1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 1.308 billion yuan, +2.79% year over year; net profit to mother of 0.218 billion yuan, -0.59% year over year; net profit of 0.193 billion yuan after deduction, -0.47% year over year. Among them, 2Q24 revenue was 0.656 billion yuan, +0.51% YoY; net profit to mother was 0.096 billion yuan, -11.70% YoY; net profit after deduction was 0.088 billion yuan, or -3.69% YoY. 1H24's performance fell short of our expectations, mainly due to the company's increased investment in advertising and stores.

Revenue from 1H24 direct sales and online channels was under slight pressure, and group purchase revenue increased significantly. By channel, 1H24 direct channel revenue was -0.9% to 0.31 billion yuan, compared with 14 to 498 stores at the end of 23; 1H24 franchise channel revenue was +1.9% to 0.33 billion yuan, and the number of stores was net opened 23 to 1,033 at the end of 23; 1H24 online revenue was -0.6% to 0.53 billion yuan; 1H24 group buying and other channel revenue was +33.3% to 0.14 billion yuan, mainly due to The company has increased the development of group buying business, and orders are good. On a quarterly basis, 2Q24 direct/franchise/online/group buying and other channel revenue was -5.6%/-2.0/ -2.8%/+48.7% year-on-year, respectively.

Gross profit margins continued to rise, and net interest rates for increased advertising and store investment declined. 1H24's gross margin was +0.8ppt to 55.0% year over year, of which direct management/franchise/online gross margin was -0.5ppt/+2.0ppt to 68.0%/53.2%/46.5%. We believe this is due to the company's adherence to the high-end home textile positioning.

In terms of expenses, 1H24's sales expense ratio was +1.8ppt to 28.8% year over year, mainly due to the company's increased investment in advertising expenses and the increase in decoration costs for newly opened stores; 1H24's management/R&D/finance cost ratio was -0.4pp/+0.4pp/ -0.3ppt to 4.1%/3.6%/-0.8% year over year. Overall, 1H24's net profit margin was -0.6ppt to 16.7% year-on-year.

As of 1H24, the company's inventory was +11.1% YoY to 0.82 billion yuan, corresponding turnover days +1.4 to 232.4 days; accounts receivable were +40.7% YoY to 0.25 billion yuan, corresponding turnover days +13.2 to 43.8 days YoY. 1H24's net operating cash flow was -67.2% year-on-year to 0.093 billion yuan.

Development trends

We expect that under pressure from the terminal retail environment, the company will continue to maintain its strategy of expanding stores to continuously increase its market share. Direct management and franchise channels are expected to open a total of 140-200 new stores throughout the year. We are optimistic that the company will maintain a good level of profit through refined operations.

Profit forecasting and valuation

Considering the uncertainty of the terminal consumption environment, we lowered the company's 2024/25 profit forecast by 9%/12% to 0.582/0.602 billion yuan. The current stock price corresponds to 2024/25 10.9x/10.5xp/e, respectively. Maintaining a neutral rating, considering the downward trend in the industry valuation center, the company's target price was lowered by 33% to 8.63 yuan, corresponding to 2024/25 12.4x/12.0x P/E, with room for 14% increase compared to the current stock price.

risks

Terminal consumer demand falls short of expectations, channel expansion falls short of expectations, online growth is slowing down, etc.