Key points of investment

1. One-sentence logic

The company is a leading exporter of functional sofas. It is mainly produced in Vietnam and mainly consumed in the US. The company's manufacturing sector is growing steadily, and the brand part relies on the store-to-store channel model launched this year, and revenue and profit growth are expected to exceed expectations.

II. Logic that exceeds expectations

Market expectations: The company's compound revenue and profit growth rate is 15-20% over the next three years. The split is mainly based on the company's ability to continue to develop new customers and categories. The brand building part. This year is the company's initial year from mixed store to store. The market is concerned about the certainty of building stores and the sustainability of store construction, and has not fully anticipated the impact of brand building on performance.

We believe that store-to-store revenue may be 3-4 times that of a single store in the previous period, and the growth of independent brands is expected to contribute additional revenue growth, driving the company's overall performance beyond expectations.

Main departments:

1) The market is unaware that the company's brand building has taken hold. It is feared that the construction of “white label” stores will be difficult to advance, leading to insufficient awareness of the company's brand growth. We believe that judging from history, the company has a certain foundation of independent brands and did not completely start from scratch. Looking at the breakdown, the company's OBM accounted for 12% of revenue in '20, OBM accounted for 26% in the context of the decline in the OEM business, and 31% in '23. The corresponding company's brand MOTO already has a certain understanding from the perspective of a core home furnishing retailer. For example, NFM, the leading US home retailer, has been recommending the company's MOTO series products. Up to now, the company has had many US retailer customers. In 23 years, the company has developed 32 new retail customers, 5 of which are the TOP100 furniture retailers in the US. For customers with existing brand business cooperation, the actual pace of store-to-store opening this year is also smoother than market expectations.

2) The market is concerned about the balance between in-store construction and OEM business and the sustainability of store construction. We believe that outstanding innovation ability is the foundation of the company. Judging from history, other merchants have also tried their own brands in overseas markets, but the OEM business is already large, so there is no balance between OEM and brand interests. On the other hand, products may be cost-effective, but the perspective of innovative design and product differentiation is still insufficient. We believe that the characteristics that are difficult to replicate in the process of growing ingenuity will effectively address the problems in brand building.

Innovation and differentiation capabilities: Relying on the integrated advantages of the industrial chain, ingenuity has formed strong design and development capabilities. It is absolutely leading among sofa exporters in terms of corresponding product innovation and price segment (Ingenuity's overseas business 23 years gross profit margin of 32%, leading competitors), and OEM customers rely on ingenuity to differentiate new products to a certain extent (for example, Ashley has a factory in Vietnam, but is still the company's largest customer). From the perspective of continuous brand expansion, the company's MOTO brand became a hit when it launched video sofas in '23, and also helped the company develop customers. In 24Q1 alone, the company's retailers added 24 new customers, 2 of which were the top 100 furniture retailers in the US.

Management with strong overseas market expansion capabilities: Ingenious Chairman Li Dong has strong customer development capabilities. Previously, he was an international liaison officer in the International Department of the National Sports Commission (now the State Administration of Sports) and the China Olympic Committee, and has strong external market expansion capabilities. In '23, the company had only 70 sales personnel, accounting for 1.71% of the total number of employees, and the sales expense ratio was only 2.9%.

3) Based on the above two points, the market does not have clear expectations for store-to-store contributions. We believe that the company's store-to-store will be able to contribute more than 10% to revenue growth. We are optimistic that the company's brand building will be verified, and the single-store model will gradually work out. In line with competitor Lazyboy's growth path, we have reviewed and found that the single-store revenue of the lazyboy store is 3-4 times that of the retail store. The revenue of a single store in the mixed store is less than 0.1 million US dollars, while the revenue of a single store in the store is about 0.38 million US dollars. This is mainly due to the increase in customer traffic and conversion efficiency after the brand is revealed. We are optimistic about the success of the store in the ingenuity store with strong product strength. We conservatively expect that the level of a single store in the store will reach about 0.3 million US dollars/store compared to Lazboy, thus driving the company's business growth. The profit margin takes into account the small investment in the company's stores. The scale effect of increasing revenue growth covers some business investment costs. Profitability has remained stable, and the overall profit growth rate may be close to revenue.

III. Inspection and Catalysis

Test indicators: store-to-store construction progress, store-to-store single-store model, possible catalysts for the company's monthly shipments: store-to-store construction & single-store model exceeding expectations, company monthly shipments exceeding expectations, financial report announcements, US interest rate cuts, etc.

IV. Research value

A different perception:

The perception of the store-to-store model is different, so we are more optimistic about the certainty of building our own brand under the company's channel model upgrade. Reviewing the growth of American household appliances, store-to-store is a common channel upgrade direction for small and medium-sized product brands. The model is to separate zones within retailer stores to centrally sell individual brand products, which has the effect of product display & brand exposure and promotion. Compared with the mixed store model, sales transformation will improve significantly. Take Lazboy as an example. The estimated pick-up amount for a single store is less than 0.1 million US dollars, while the in-store pickup amount is about 0.38 million US dollars. The channel model upgrade will significantly improve the company's store efficiency. We are optimistic that the expansion of the company's store-to-store model will expand the brand growth potential.

5. Profit Forecast

We expect the company to achieve revenue of 2.34/3.05/3.82 billion yuan in 24-26, +22%/+30%/+25%, respectively, and net profit to mother of 0.51/0.64/0.8 billion yuan, respectively +24%/+26%/+25%, corresponding to PE 14/11/9X, maintaining the purchase rating.

Risk warning

Independent brand expansion fell short of expectations, raw materials fluctuated, and exchange rates fluctuated.