1H24 results fall short of our expectations

The company announced 1H24 results: 1) 1H24 operating income of 3.366 billion yuan, -5.01% year on year; net profit to mother 0.385 billion yuan, -3.04% year on year; net profit without deduction of 0.321 billion yuan, -8.28% year on year; 2) corresponding 2Q24 operating income 1.783 billion yuan, -12.64% year on year; net profit to mother 0.264 billion yuan, -11.72% year on year; net profit after deduction 0.218 billion yuan, -20.6% year over year. The company's performance fell short of our expectations, mainly due to weak terminal demand, and all channel operations were under pressure.

Real estate completion transmission puts pressure on the company's revenue side in 2Q24. 1) According to data from the National Bureau of Statistics, the completed area of new homes in 1Q24/2Q24 was -21%/-23%, respectively, ending the growth trend since 2023; the company mainly has domestic lighting sales business, which has strong product decoration properties, and is transmitted by real estate completion pressure. Demand for industry terminals is weak. 2Q24 operating pressure is evident, and revenue began to decline year on year. 1Q24/2Q24 revenue was +5%/-13% year-on-year, respectively. 2) By channel: Home furnishing channels, the company continues to strengthen retail store output and distribution channel market coverage. The 1H24 distribution network layout and outlet quality have all improved. We estimate that the 1H24 home channel performance may be better than the company's overall; commercial licensing channels, B-side lighting demand has not recovered significantly, and we estimate that its performance is under pressure; e-commerce channel performance is relatively stable, and overseas business is still expanding, but it has declined due to geopolitical factors in some regions.

Financial analysis: 1) Benefiting from the advantages of scale cost reduction and efficiency improvement brought about by platformization and digitalization, 2Q24's gross margin was +0.8ppt to 40% year-on-year, maintaining a good gross margin level. 2) The company's expense investment continued the previous trend, but due to the decline in revenue scale, the cost rate increased slightly. The 2Q24 sales expense rate/management fee rate/R&D expense ratio were 18.8%/4.0%/4.3%, respectively, +1.7/+0.4/+0.3ppt. Under the combined influence, 2Q24's net interest rate to mother was 14.8%, +0.2ppt year on year, and its profitability was relatively good and stable.

Development trends

As a leading domestic home lighting enterprise, the company has experienced adjustments and transformation in 2021-2022. Internal operating efficiency and channel management have been improved, and product development planning and comprehensive cost competitiveness have improved, thus also driving the company's profitability to improve starting in 2023. Although the pressure to complete and sell new homes in China is still high in the short term, and the lighting business may be under pressure, we believe that the company's overall channel layout and product competitiveness are leading, while also grasping segmentation trends such as no headlights, and the performance is expected to be better than the industry.

Profit forecasting and valuation

As demand for home lighting terminals is still under pressure, we cut our 2024/2025 net profit by 16%/15% to 0.871 billion yuan/0.965 billion yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 12.2 times/11.0 times.

Considering the company's leading overall competitiveness and stable profitability in the industry, we still maintain the industry rating, but based on the reduction in profit forecasts, we simultaneously lowered our target price by 20% to 18.5 yuan, corresponding to the price-earnings ratio of 15.8 times/14.3 times in 2024/2025, with 30% upside compared to the current stock price.

risks

Risk of fluctuations in market demand; risk of increased competition; risk of a decline in real estate sales exceeding expectations.