preface

The company is a leading domestic manufacturer and exporter of office chairs. In '19, the company began a strategic transformation. Although the company previously experienced certain setbacks in epitaxial expansion, the current layout is gradually being sorted out, the relevant risk of impairment has basically been released, and the cross-border e-commerce business is driving the company into a new stage of development. This report focuses on analyzing the future prospects of the three major business segments.

Investment logic

Why do we think the company's cross-border e-commerce is expected to continue to grow rapidly? The company has been forward-looking in cross-border e-commerce business since '19. With the improvement of the operation team and the gradual expansion of categories and platforms, the company's revenue from this business has now grown rapidly, with a revenue CAGR of 59% in 21-23. Looking ahead, we believe that the company's cross-border e-commerce business is still expected to continue to grow rapidly. On the one hand, there is still room for improvement in e-commerce penetration in overseas markets. Chinese e-commerce platforms are speeding up overseas, which is expected to marginally accelerate the increase in overseas e-commerce penetration rates (e-commerce penetration rates in China and the US were 27.6% and 17.1%, respectively). On the other hand, the company has a strong multi-dimensional competitive advantage, and the positive circular effect is expected: 1) the company's interests are deeply tied to ensure talent stability and team momentum; 2) self-production+logistics scale advantages shape the ultimate product cost performance ratio, which is expected to show a positive circular effect; 3) it has the traffic advantage of an Amazon VC account; 4) it has the ability to quickly enter new e-commerce platforms and categories to enjoy traffic dividends.

Traditional foundry: Stock replenishment combined with expectations of US interest rate cuts may drive the continuation of the economy. The company's traditional seat foundry business is better tied to high-quality leading customers, and this business is highly correlated with fluctuations in overall overseas demand. Since 23Q4, China's overall furniture exports have improved markedly, and the cumulative export value of office furniture from January to April '24 was +31.3% YoY. The export boom is still good. The US furniture industry is in the inventory replenishment cycle. Judging from the inventory review history, the replenishment period is expected to last 6-12 months. The company's seat foundry business boom may be expected to continue until 24H2, and if expectations of subsequent US interest rate cuts are implemented, the boom is expected to rise further marginally.

Outreach business: Stable business development can be expected, and the risk of impairment of goodwill is manageable. The company's epitaxial business mainly includes system office (LO acquired in '19), panel furniture (acquired Dr. Chef in '21), and new material flooring (acquired Yongyu Home in '22), which contributed 3.23 billion yuan in revenue in '23. The company calculated 0.09 billion yuan in goodwill depreciation of Dr. Chef over 23 years, and the total remaining goodwill was 0.38 billion yuan (including Dr. Chef 0.08 billion yuan and Yongyu 0.28 billion yuan). The epitaxial business can be expected to develop steadily in the future with the parent company's increased management capabilities. Considering that the company will take the opportunity to optimize asset allocation, the overall risk of impairment is manageable.

Profit forecasts, valuations, and ratings

We expect the company's net profit to be 0.547/0.677/0.802 billion yuan in 24-26, +107.8%/+18.5% year-on-year. Considering that the company's cross-border e-commerce is still in a period of rapid growth, we give a reasonable valuation of 15X and a target price of 59.0 yuan/share for 24 years, maintaining a “buy” rating.

Risk warning

Shipping costs have risen sharply, overseas demand recovery has fallen short of expectations, risk of impairment of goodwill, risk of exchange rate fluctuations, risk of rising raw material prices, and risk of equity pledges.