A leading office furniture company, continues to lay out major household racetracks. The company was founded in 1998 and listed on the A-share main board in 2017. Looking back at the company's development, the company entered the foreign trade market as early as 2002, was recognized as a “national high-tech enterprise” in '10, with an output value exceeding 1 billion. Since 19, it has successively acquired subsidiaries such as Lista Office, Dr. Chef, and Yongyu Home Furnishing to promote its own “big home” circuit layout; since 20, the company has vigorously promoted the development of cross-border e-commerce and continuously enhanced the competitiveness of its own brands. In 2017-23, the company's revenue and net profit increased by 27.6% and 8.0% to 8.19 and 0.26 billion yuan. Revenue continued to grow rapidly, and the overall profit growth rate was slower than revenue. Cross-border e-commerce growth in '23 combined with Yongyu's annual revenue achieved a year-on-year revenue increase of 25.8%. The profit side declined 26.6% year-on-year due to Dr. Chef's goodwill impairment charges, etc.

Basic OEM: Multiple factors catalyze an increase in overseas demand, and the repair of the OEM business can be expected. According to CSIL data, China's share of self-production and self-sales is as high as 98%, while the US, a major consumer of furniture, accounts for only 61%, and 39% comes from imports. Among the top ten furniture consumers in the world, developed regions such as Europe and the US occupy 6 seats and still have a large share from imports. China is currently the world's largest furniture producer and exporter, and has the largest consumer market. Chinese furniture and home furnishing companies overseas are expected to usher in new opportunities for development. Home retail and wholesale are the post-real estate cycle, catalyzed by overseas economic recovery, subsidy policies, and a 20-year rise in shipping costs. Demand for home use in the US rose in '21. Entering '22 was affected by the interest rate hike cycle and high base. Furniture sales entered the inventory digestion stage. Since March '23, growth in household demand in the US has further slowed down, compounded by the crowding effects of high inflation and continuous interest rate hikes on durable consumer goods. The overall inventory ratio is relatively low, and terminal demand has begun to enter the inventory replenishment stage.

Traditional foundry repairs can be expected, and the acquisition of Yongyu to expand the new material flooring sector is expected to increase profits. The company's foundry business accounts for about 60% of the company's main business revenue. In 21-23, the company's traditional foundry business was a compound growth rate of -4.9% due to high inflation, squeezing demand and high overseas inventory and weak demand in the early stages. Earlier, we discussed the end of the overseas interest rate hike cycle and continued restoration of real estate sales leading to a continuous rise in exports of products related to the post-cycle real estate cycle, mitigating the effects of crowding out, and the arrival of a new rotation cycle. The company's traditional foundry business is expected to fully benefit and usher in a new round of restoration. In '22, the company expanded Yongyu Home Furnishing, which focuses on R&D, production and sales of household products such as flooring, wall panels, and bamboo furniture, and was consolidated in November of the same year. In '22 and '23, Yongyu contributed revenue of 0.228 billion yuan and 1.5 billion yuan respectively, accounting for 3.4% and 18.2% of the main business revenue, contributing to the company's total reported profit of 0.86 million yuan and 168 million yuan respectively.

Independent brand business: Taking advantage of the cross-border e-commerce industry, the company's own brand & cross-border e-commerce business is making great strides forward. According to eMarketer Forecast data, global e-commerce retail sales CAGR 8.1% to 5.8 trillion US dollars in 2021-23. The industry size is expected to increase by 8 trillion US dollars in 27, and the CAGR will reach 7.9% in 24-27. Under current overseas inflation, European and American consumption is more cost-effective and online. E-commerce channels naturally have convenience and price advantages. According to Euromonitor data, the European online penetration rate of the world's largest consumer goods market increased to 15.8% (VS.9.7% in 2018), while the US online penetration rate increased to 27.5% in 23 years (VS.18.1% in 2018). With the booming development of the Internet and logistics industry, the share of online channel sales is increasing year by year. Meanwhile, according to iResearch, China's cross-border e-commerce industry CAGR is 25.1% to 6.6 trillion yuan on 17-22. It is estimated that China's cross-border export e-commerce industry will reach 10.4 trillion yuan in 25. It relies on the perfect domestic supply chain and the leading advantages accumulated by the e-commerce industry to achieve rapid development, firmly occupy the majority of the cross-border e-commerce transaction structure, and has become a new driving force for international trade.

Outreach mergers and acquisitions of independent brands drive domestic sales growth and promote cross-border e-commerce to accelerate independent brands going overseas. The company owns brands such as “Henglin, Lista Office LO (100% indirect shareholding), Dr. Chef (100% direct shareholding), and NOUHAUS”. The CAGR of the company's OBM business reached 28.2% in 2021-23. Among them, the company's endogenous brand (Henglin & NOUHAUS & cross-border e-commerce), LO, and Dr. Chef's business revenue CAGR reached 54.8%, 19.7%, and 3.7% respectively, contributing 19.8%, 13.2%, and 8.1% to revenue in 23, respectively. In terms of cross-border e-commerce, the company covers US online retail platforms such as Amazon, Wayfair, and Walmart. Currently, it mainly uses the US Amazon platform. It completed the entry of platforms such as Tiktokshop and Shein in 23, and also lays out social media such as Facebook and Instagram. The multi-platform layout is expected to open up room for growth. The company's e-commerce business achieved revenue of 1.62 billion yuan, an increase of 60.5% over the same period, contributing about 20% of revenue, and increased to more than 30% in 24Q1. According to Hugo's cross-border data, it achieved the number one sales volume in the household category on the Tiktok platform in '23.

Profit forecasting and investment advice. Based on the above assumptions, we expect the company's 24-26 revenue to be 10.48/12.6/15.12 billion yuan, respectively, and the 24-26 EPS will be 3.56/4.40/5.27 yuan/share, respectively. Referring to the closing price of 39.83 yuan/share on July 10, 2024, the corresponding PE will be 12 times, 9 times, and 8 times, respectively, covered for the first time, giving a “buy” rating.

Risk warning: Risk of declining overseas demand, risk of international trade friction, risk of fluctuations in raw material prices, risk of fluctuations in RMB exchange rates and changes in export tax rebate policies, risk of concentration of major customers, risk of developing new categories falling short of expectations, cross-border e-commerce business development falling short of expectations.