Matters:

The company issued the “Notice Concerning the Company's Plan to Repurchase Some Public Shares through Centralized Bidding Transactions (Phase III)”. It plans to use its own funds to repurchase the company's shares through centralized bidding. The repurchase of shares will be used to implement employee stock ownership plans or equity incentives. The repurchase amount is not less than RMB 30 million (inclusive) and not more than RMB 50 million (inclusive), and the repurchase price is not more than RMB 3.50 per share. Based on the maximum repurchase amount, the estimated number of shares that can be repurchased is 14.2857 million shares, accounting for 0.23% of the company's total share capital as of March 31, 2024; if calculated based on the lower limit of the repurchase amount, the estimated number of shares that can be repurchased is 8.5714 million shares, accounting for 0.14% of the company's total share capital as of March 31, 2024. In addition, the company also issued the “Shareholder Return Plan for the Next Three Years (2024-2026)”. If conditions are met, cash dividends for the next three years can be distributed at least 30% of the annual profit.

Commentary:

The transformation of digital intelligence continues to deepen, and the company reached a cooperation with Huawei. In June 2024, a strategic cooperation agreement was actually signed with Huawei on the sale of smart products for the whole house, cooperative store construction, and marketing enablement, which will further promote inter-company business collaboration. 1) Dongwo is the company's digital base market. As of June 28, it is expected to achieve a GMV of about 46 billion yuan, of which the unfounded system merchants will contribute nearly 13 billion yuan, and it is expected to achieve a break-even balance in 2024. 2) At the end of 23, the number of registered users of designers worldwide exceeded 14.77 million (including 12.82 million overseas users), and the number of design cases exceeded 32.686 million. In the future, it is expected that it will continue to empower home improvement and overseas business expansion and increase conversion rates. 3) Actually, Smart Home uses an asset-light model and plans 50 integrated stores in 24 years, hoping to increase the revenue share of the “human car business” and thereby optimize the company's profitability.

Sales sharing achieved deep binding, and the second curve performed beautifully. Under the sales sharing model, stores are deeply tied to customers, and both store investment rates and store efficiency have improved; as of May 2024, the company has cooperated with 0.012 million merchants to implement the sales sharing model. Shopping malls in the “China Business World” focus on the layout of Tier 1 and 2 core cities and provincial capitals through various models such as asset-light management and export, and investment, mergers and acquisitions. It is hoped that the number of shopping malls will double to 10 by 2025, and the number of shopping malls will reach 20 by 2030. Furthermore, in terms of internationalization, the company's cross-border e-commerce platform “Xinwo” was launched. The Cambodian Phnom Penh/Macau store is operating well, and the investment rate is 96% +, which is expected to contribute to revenue growth in the future.

Investment advice: Dividend repurchases show confidence, and digital transformation is progressing steadily. The company is a leading domestic pan-home chain store enterprise. It innovates the “sales share” and “one store, two systems” models to increase the investment rate; at the same time, it accelerates digital intelligence transformation and empowers the layout of pan-home furnishing industry chains such as home improvement, design, and smart homes. We expect the company's net profit to be 1.43/1.57/1.71 billion yuan for 24-26, corresponding to the current PE price of 11/10/9 times. Using a relative valuation method, the 24-year PE is 16 times, corresponding to a target price of 3.6 yuan/share, and maintain the “recommended” rating.

Risk warning: The development of home furnishing stores falls short of anticipated risks, industry competition intensifies, and terminal demand falls short of expectations.