Key points of investment

Event: The company publishes its 2024 mid-year report. 2024H1 achieved revenue of 3.088 billion yuan, -10.07% YoY; net profit to mother 38 million yuan, or -77.82% YoY. Among them, Q2 achieved revenue of 1.953 billion yuan, or -15.96% YoY; net profit to mother 0.128 billion yuan, or -23.69% YoY.

Demand pressure increased quarterly, and e-commerce and engineering channel revenue declined significantly in the first half of the year. On a quarterly basis, 2024Q1-Q2's revenue was +2.26%/-15.96%, respectively. Since entering Q2, pressure on the completion side has increased significantly, and overall demand is weak. By channel, 2024H1 achieved revenue of 12.50/0.625/0.479/0.698 billion yuan in retail (store) /e-commerce (store) /home improvement/engineering channels, respectively, or -6.33%/-12.64%/-5.96%/-17.73%. At the end of 2024H1, the company had a total of 19,621 distribution terminal stores, a net increase of 2,054 over the end of 2023. The new outlets were mainly home improvement stores, community stores and township stores. Looking at the subregion, 2024H1's overseas revenue was 0.162 billion yuan, an increase of 178.25% over the previous year. The company continues to promote its internationalization strategy and comprehensively accelerate overseas market expansion. In terms of smart toilets, 2024H1 sales volume increased 2.55% year on year, and smart toilet revenue was 0.635 billion yuan, down 7.66% year on year, mainly due to the increase in the share of light smart sales and the sharp drop in volume and price of all smart products.

Gross margin declined slightly year over year, and expenses increased during the period. 2024H1's gross sales margin was 27.03%, year-on-year change of -2.41 pct. On a quarterly basis, the gross sales margins of 2024Q1-Q2 were 24.40% and 28.56%, respectively, with year-on-year changes of -6.04pct and -0.4pct, respectively. The main reason was the decline in product prices due to increased competition in the industry. In terms of the cost ratio for the period, 2024H1's sales/management/R&D/finance expense ratios were 7.60%/11.22%/5.48%/0.64%, respectively, with year-on-year changes of -0.89 pct/+2.02pct/+1.11 pct/+0.68pct. Apart from the reduction in dealer subsidies in terms of sales expenses, the increase in the cost ratio during the rest of the period was mainly due to the decline in revenue scale and cost dilution.

Net cash flow from operating activities declined year over year. The net cash flow from 2024H1's operating activities was -0.59 billion yuan, or -429.64% year-on-year, mainly due to a decrease in the amount of cash received by 2024H1 from sales of products, payment of materials purchased, and an increase in employee remuneration. 1) Payout ratio: 2024H1 company's revenue ratio is 104.21%, year-on-year change -5.13pct; 2) Pay-as-you-go ratio: 2024H1 company's pay-as-you-go ratio is 114.97%, year-on-year change +13.14pct.

Profit forecast and investment rating: The company is a leading domestic sanitary ware company with deep accumulation in terms of brand power, product strength, and channel power. In the future, the company is expected to use intelligent product optimization to optimize product structure, product sales package to drive customer unit price increases, online channel and refined operation to further consolidate the company's core competitiveness in the sanitary ware industry. Considering the intensification of price competition in the industry, we lowered the company's 2024-2026 net profit forecast to 0.344/0.431/0.526 billion yuan (previous value was 0.448/0.566/0.664 billion yuan), and the corresponding PE was 18X/15X/12X, respectively, maintaining the “gain” rating.

Risk warning: the risk of fluctuations in downstream demand, the risk of increased market competition, the risk of large fluctuations in raw materials and energy prices, etc.