Description of the event

2024H1 achieved revenue/net profit/net profit to mother of 8.908/0.896/0.781 billion yuan, or +0.3%/-7% year-on-year; of these, 2024Q2 achieved revenue/net profit/net profit deducted non-net profit of 4.558/0.476/0.405 billion yuan, a year-on-year decrease of 7%/9%/18%.

Incident comments

Q2 Domestic sales are under pressure, while custom/functional sofas are more resilient. Domestic sales in Q2 are estimated to be under year-on-year pressure (H1 fell 10%), mainly due to the impact of the high base for the same period last year and the current weak domestic demand, and the decline will narrow if the effects of the divestiture of the Tianxi faction are reverted. By category, it is estimated that customization continues the superior growth trend (H1 increased by 25%), continuously contributing to growth momentum by opening stores and improving product strength; functional sofas are more resilient under the catalyst of increased industry penetration and dividends; mattresses are under pressure in stages, which are related to factors such as the decline in demand for new homes affecting associated sales. Currently, the company has adjusted its products and marketing strategies in a timely manner, and the subsequent trend is expected to improve sequentially. In terms of the store format, under the guidance of the “one, two wings” strategy, on the one hand, it continues to transform into integrated stores and large home stores. The number of integrated stores has surpassed 300 in 2023, and H1 stores have further accelerated this year. Currently, total package sales in integrated stores account for more than 35%; on the other hand, stores targeted at Gujia Star Choice, Gujia C stores, and the Lehuo series are continuously expanding, speeding up the layout of the decoration enterprise & shopping center channel and sinking market.

Q2 The number of sofas sold in export continued to rise, and the production capacity of mattresses was climbing. Q2 export sales are estimated to have grown (H1 increased 13%), with sofas likely continuing to be high; mattress revenue contracted year-on-year, mainly due to the shift in corresponding production capacity to the US and still in the climbing phase, and the trend of receiving orders remained excellent. In terms of business models, new business formats such as SPO and cross-border e-commerce continue to be cultivated, and the H1 trend is good.

Q2 Operating profit was stable after reverting to the effects of foreign exchange. It is estimated that export earnings improved significantly. Q2 gross margin increased by 2.0 pcts. Among them, domestic sales are estimated to be relatively stable, and there may be significant improvements in export sales (H1 gross margin increased by 2.9 pcts), which is related to factors such as base volume expansion, active cost control, and structural improvements in Vietnam. Q2 Sales/management/ R&D/finance expense ratios were +1.2/-0.9/+1.4/+1.6pcts year over year, with exchange earnings decreasing year over year (24Q2/23Q2 were approximately 0.01/0.09 billion yuan, respectively). The Q2 attribution/deduction of non-net interest rates was reduced by 0.2/1.2pcts. The difference between the two was related to a larger increase in government subsidies in Q2 (0.097/0.035 billion in 24Q2/23Q2, respectively); after reverting the effects of exchange in Q2, non-net interest rates remained flat year-on-year.

Refine internal skills in a weak consumption environment, adhere to retail transformation, and improve product matrix construction and warehouse service construction. H1 actively adapts to consumer trends and adopts a “lift high and lower” strategy to expand customer coverage, especially the launch of cost-effective series such as Huimin Project and Huishang series; at the same time, the company continues to upgrade its product capabilities, such as functional sofas with zero-wall technology, ergonomic mattresses, and anti-bacterial customization. Among them, functional sofas continue to invest in R&D and components are converted to self-manufacturing, customization continues to reduce costs and improve efficiency, and the H1 gross margin is still the same as 6.85pcts, while the H1 gross margin is still the same as 6.85pcts. At the level of retail transformation, warehousing service+digitalization continues to advance, and H1 further increases the coverage rate of warehouse distribution services. It is expected to exceed 50% this year, promoting optimization of distribution costs and efficiency.

Domestic sales product strength and channel power are the starting point, and large homes are the direction; export sales continue to improve quality and efficiency. In terms of domestic sales, the company is improving efficiency and reducing costs to improve product strength, focus on channel efficiency, strengthen the expansion of integrated store formats and complete channels, and strengthen demand exploration for existing housing; warehousing service and digital capacity building continue to pay off. Export profits continued to improve, and the share of overseas production capacity increased. The company's net profit for 2024/2025 is estimated to be 2.01/2.19 billion yuan, corresponding to PE 10/9x, maintaining a “buy” rating.

Risk warning

1. Real estate sales and completion fell short of expectations;

2. The company's channel expansion and operation fell short of expectations.