Retail stores: cash flow is king, and the strong are always strong

Strong cash flow+light asset heavy operation to create a pan-home service ecosystem. The direct management+franchise model combined to expand the store chain. Among them, Tier 1 and 2 cities are dominated by direct-managed stores, and low-tier city franchises are sinking at an accelerated pace. As of the end of '23, the number of direct-operated/franchised stores was 86 or 328 respectively, with asset-light stores accounting for around 96%. Under the asset-light and business-heavy operating model, the company's operating performance is ahead of competitors in operating indicators such as operating efficiency (6.2% CAGR for direct-run stores in 2020-2023), asset turnover ratio (0.25 times in 23), and ROE (6.6% in 23).

In addition, the company actively aggregates traffic through public domain private domain operations, live streaming matrix construction, joint marketing IP, digital platforms, etc., to improve the quality of consumer service by improving “first payment”, etc.; in '23, it innovatively proposed a “one store, two systems” investment model with fixed rent and sales sharing, which is conducive to breaking through the company's revenue ceiling under the traditional fixed rent model.

Digital intelligence upgrade: With “Dongwo” as the core, the three digital intelligence platforms enable growth companies to take the lead in digital transformation in the home furnishing industry. By charging platform service fees, it is expected that revenue growth will be enabled:

1. Dongwo: A service platform for the digital home improvement and home furnishing industry. Net sales increased from 34.6 billion yuan to 97.4 billion yuan in 2022. The number of platform users and the associated rate level of individual user categories continued to increase, and customer order value and customer order volume increased by about 10% in 23 years.

2. Practical designer (former designer of every square meter of house): AI home decoration design platform. By the end of 2023, the number of registered users worldwide exceeded 14.77 million, up 19% year on year; the number of design cases exceeded 32.686 million, up 18.5% year on year; the number of models exceeded 12.44 million, up 27.4% year on year.

3. Actually smart home: smart life service platform. In 2023, 57 new stores were opened, with sales exceeding 4.4 billion yuan, an increase of 58.4% over the previous year; by the end of 2023, there were more than 200 connected cooperative brands, more than 120,000 connected devices, and more than 200,000 registered app users.

Accelerate internationalization strategy: Implementing internationalization and increasing the pace of going global in stark contrast to fierce competition in the domestic market is that supply in the international market is insufficient. China's home industry chain is very rich. Under the leadership of leading companies, domestic home furnishing brands will make a big difference when going overseas. The company will use the Cambodia Phnom Penh store as a pilot project to speed up the international layout and inject a new engine into development.

The opening of the Macau store and the Phnom Penh store will be completed in 2024, and the physical store chain layout in most Southeast Asian countries will be completed within 5 years. Promote the internationalization of “Dongwo” and expand cross-border e-commerce business for the home. On the basis of physical stores and “dongwo” going overseas, designers and actually smart families will also go overseas at an accelerated pace.

Adjust profit forecasts and maintain buying ratings

The company is a leader in the pan-household service ecosystem. The main business has broken through the game and digitalization has created a new growth curve; in addition, the organizational structure continues to transform according to the S2B2C model and implement a refined marketing model, and the results of management adjustments are expected to gradually become apparent. We expect the company's net profit to be 14.5/15.9/1.74 billion yuan in 24-26 (the previous value was 1,47/15.7/1.72 billion yuan, respectively), and the corresponding PE was 12/11/10X, respectively. Referring to the average of comparable companies, the company was given 18-19 times PE in 24 years, corresponding to a target price of 4.1-4.4 yuan, maintaining a “buy” rating.

Risk warning: risk of macroeconomic fluctuations, increased risk of industry market competition, risk of opening new stores falling short of expectations, risk of home furnishing store business development