Key points of investment

Event: The company released its 2024 semi-annual report. With 2024H1, the company achieved revenue of 3.72 billions/ +41% yoy, net profit of 0.17 billion yuan/ -7.7% yoy, after deducting non-net profit of 0.16 billion yuan/ -25% yoy. Corresponding to 2024Q2, the company achieved revenue of 1.88 billion yuan/ +37% yoy, net profit of 0.07 billion yuan/ -28% yoy, deducting non-net profit of 0.06 billion yuan/ -50% yoy.

The year-on-year decline in the company's profit was mainly due to the decline in profit margins due to factors such as shipping. 2024Q2, the company's gross margin was 33.9%, -2.2pct; the net margin was 3.8%, -3.4pct; the sales/management/R&D expense ratio was 25.0%/3.4%/1.0%, -2.0/ -0.9/ -0.4pct yoy. The decline in profit margins and the increase in expense ratios are mainly due to: ① the company's price reduction and promotion investment to increase market share; ② the year-on-year increase in shipping costs due to the Red Sea incident, and the increase in storage expenses due to the company's expansion of overseas warehousing services; ③ exchange rate factors, the 2024H1 company experienced an exchange loss of 6.6 million yuan, with a profit of 17.73 million yuan for the same period last year.

By category: The main categories of furniture and home furnishings performed steadily. 2024H1's furniture series revenue was 1.89 billion yuan, +39% year over year; home series revenue was 1.33 billion yuan, +50.2% year over year; pet series revenue was 0.31 billion yuan, +37% year over year; sports and outdoor revenue was 0.13 billion yuan, +3.4% year over year. The company's next product (product launched in 2023) performed well in the first half of the year and was an important driver of the company's revenue growth. The sports outdoor category is growing slowly due to European climate and shipping factors. 2024H1

By region and channel: Europe and the US are going hand in hand, but Europe's gross margin is under pressure. 2024H1, the company achieved revenue of 2.28 billion yuan/ +41% yoy in Europe, and gross margin of 36.1%/yoy-3.7pct. North America's revenue was 1.34 billion yuan/ +41.1% yoy, and gross margin was 33%/+2.0pct. The pressure on gross margins in Europe is obvious, or is related to shipping costs. By channel, the company's B2C channel revenue was 3.18 billion yuan/ +49% yoy; B2B channel revenue was 0.49 billion yuan/ +5.7% yoy. B2C channel growth was strong, reflecting an improvement in the company's market share and brand awareness in e-commerce platforms.

The company's core capabilities in terms of brand product channels have all been improved: ① On the brand side, in 2024, the company established SONGMICS HOME as the main brand, and integrated the original three product matrices to enhance brand influence. ② On the product side, serialized products were launched to form a family-style series appearance and promote related purchases. ③ On the logistics side, overseas warehousing was optimized. The overseas warehouse area reached 0.35 million square meters. Europe set up front warehouses in France, Italy, and the US spontaneously completed the five-warehouse layout increased from 8.5% at the beginning of the year to 15.7% in June. ④ On the channel side, expand traffic opportunities on emerging platforms such as temu and shein, explore potential markets such as Australia and Mexico, and build European offline teams to cultivate KA opportunities, etc.

Profit forecast and investment rating: The company's long-term core competitiveness improved in the first half of the year, but performance was pressured by macroeconomic factors such as freight costs. As a result, we lowered the company's net profit forecast for 2024-2026 from 5.0/ 6.2/0.73 billion yuan to 4.5/5.8/0.71 billion yuan, +10%/+28%/+22% YoY, corresponding to a closing price of 17/13/ 11x P/E on August 21. Considering the continuous improvement of the company's core capabilities, the valuation is low since listing, and it still maintains a “buy” rating.

Risk warning: Fluctuations in shipping costs and exchange rates, changes in online channel traffic in Europe and the US, fluctuations in overseas furniture demand, inventory risks, tariffs and geographical risks, etc.