Revenue increased 3% in the first half of the year, and profit margins remained stable. In the first half of 2024, with the overall weak consumer environment, the company's revenue growth and profitability remained stable. Revenue increased 2.8% year-on-year to 1.31 billion yuan, and net profit to mother was -0.6% to 0.22 billion yuan. On a high base basis, gross margin continued to rise, with gross margin +0.8 percentage points to 55.0% year on year; with the exception of the sales expense ratio, other expenses remained stable. The sales expense ratio was +1.8 percentage points to 28.8% year over year, mainly due to increased advertising fees, new store decoration costs, and Baoying factory rental costs; in addition, benefiting from increased government subsidies and input tax credits in the cash manufacturing industry, other income increased 0.7 percentage points as a percentage point of revenue, making a positive contribution to net interest rate; net interest rate to mother was -0.6 percentage points year over year. Operational efficiency was stable, and the number of inventory/receivables/accounts payable turnover days was +1/+13/ -5 days, respectively, and all remained at a healthy level. Net cash flow from operating activities was -67.2% year-on-year to 0.09 billion yuan, mainly affected by the increase in cash from purchasing goods and receiving labor payments.

Revenue increased slightly in the second quarter, and profit margins were under pressure. In the second quarter, the company's revenue increased 0.5% year on year to 0.66 billion yuan, and net profit to mother increased -11.7% year over year to 0.1 billion yuan. The decline in net profit was mainly affected by rising sales expenses and non-recurring profit and loss. The gross margin continued to rise. The gross margin for the second quarter was +1.8 percentage points year on year to 55.8%; the sales expenses ratio was +2.6 percentage points year on year to 30.8% year on year. In addition, the share of non-operating income fell 1.8 percentage points year on year, mainly affected by the decline in government subsidies compared to the same period last year, which in turn led to a net profit margin of -2.0 percentage points year on year to 14.6% year on year.

The revenue performance of the franchise channel and the core category was good, and the gross margin of all channels and core categories other than direct management increased. 1) By channel: In the first half of the year, the franchise channel performed well, and both revenue and gross margin increased. Direct marketing/franchise/e-commerce channel revenue was -0.9%/+1.9%/-0.6%, respectively, and gross margin was -0.5%/+2.0%, respectively. The increase in gross margin is expected to mainly benefit from the control of wholesale discounts and the control of retail prices and return rates of e-commerce product terminals. There was a net increase in offline channel stores, with a net opening of 14/23 direct-run and distribution stores compared to the end of 2023, respectively. 2) By category: In the first half of the year, revenue from kits, quilts, and pillows was 1.3%/3.8%/0.9%, respectively, all showing positive growth. The quilt category continued the 2023 trend, leading the growth. In terms of gross margin, the gross margin of the core category package and the core core increased by 1.4 and 1.2 percentage points respectively, which is expected to mainly benefit from the increase in the share of high-end categories.

Risk warning: Market competition intensified; inventory depreciated sharply; channel expansion fell short of expectations.

Investment advice: Optimistic about the company's operational resilience and outstanding profitability. In the past, the company has continuously verified that regardless of whether the market environment is good or bad, the company continues to maintain a high level of profit and a stable compound growth rate over a long period of time based on a careful and practical management style. We are optimistic about the company's business resilience and cyclical resistance in an environment with poor market conditions. At the same time, the company maintains a high level of dividends and has a highly deterministic dividend yield. Based on the fact that the consumer recovery trend in the second half of the year is still weak, we slightly lowered our profit forecast. Net profit for 2024-2026 is 0.57/0.61/0.66 billion yuan, respectively (previous value was 0.63/0.69/0.75 billion yuan).

The reasonable valuation range was lowered to 8.9 to 9.6 yuan (the previous value was 10.6 to 11.3 yuan). The reasonable valuation corresponds to the 13-14x PE in 2024, maintaining the “superior to the market” rating.