1H24 results are in line with our expectations

The company announced 1H24 results: 1H24 achieved revenue of 8.908 billion yuan, a year-on-year increase of 0.34%, net profit to mother of 0.896 billion yuan, a year-on-year decrease of 2.97%, after deducting non-return net profit of 0.781 billion yuan, a year-on-year decline of 6.76%. The performance is in line with our expectations.

On a quarterly basis, the company achieved revenue of 4.35/4.558 billion yuan in 1Q/2Q24 respectively, +10.04%/-7.44% year on year, and net profit of 0.42/0.476 billion yuan, respectively, and +5.02%/-9.07% year on year.

Development trends

1. The growth rate of sofas and customized products is impressive. The company's revenue growth was under pressure due to weak external demand, but revenue from the sofa and custom business still achieved relatively rapid growth, rising 14.2%/24.9% year-on-year to 4.942/0.49 billion yuan, respectively. We believe it was mainly due to the drive of functional sofas and the development of the company's integration channels. Bedroom product revenue fell 19.9% year on year to 1.534 billion yuan. We expect it to be mainly affected by the relocation of overseas production capacity.

2. The gross margin increased steadily, and the cost ratio increased slightly. The company's 1H24 gross margin was 33.03%, +1.52ppt compared to the previous year. The gross margin of all products increased markedly. We believe it was mainly due to the decline in raw material prices and the optimization of the business structure. On the cost side, the company's expense ratio for the 1H24 period was 21.27%, +2.07ppt. Among them, the sales/management+R&D/finance expenses ratio was 17.02%/4.42%/-0.17%, respectively, +0.92pp/+0.86pp/ +0.29ppt. Under the combined influence, 1H24 net margin was 10.06%, -0.34ppt year over year.

3. Wait for domestic demand to pick up, and be optimistic about the steady growth trend of export sales. 1) Domestic sales: The company's entire customized store maintained rapid growth, coped with customer flow pressure by increasing customer order value, and integrated packages accounted for more than 35% of the total package in major stores. Since the 517 new real estate policy, China's second-hand housing market has picked up slightly. We expect subsequent trade-in and other policies to further recover industry demand; 2) Export sales: 1H24 export revenue increased 12.6% year-on-year to 3.887 billion yuan. The company has increased cooperation with supermarket customers to enhance SPO and brand overseas business, and its market share and profitability will continue to increase. We believe that as overseas interest rates fall, real estate demand may pick up, and the company's export sales performance is expected to grow at an accelerated pace.

Profit forecasting and valuation

Considering weak industry demand, compounded by shipping disruptions, we lowered our 2024/2025 profit forecast by 9%/14% to 2.191/2.514 billion yuan. The current stock price corresponds to 9/8 times the price-earnings ratio for 2024/2025.

Maintain an outperforming industry rating. Based on forecast adjustments and taking into account declining market risk appetite, the target price was lowered by 27% to 40 yuan, corresponding to a price-earnings ratio of 15/13 times in 2024/2025, with 59% upside compared to the current stock price.

risks

Competition in the industry intensified, store expansion fell short of expectations, and the decline in real estate sentiment exceeded expectations.