1H24 results are in line with our expectations

The company announced 1H24 results: 1H24 achieved revenue of 2.212 billion yuan, a year-on-year decrease of 3.85%; net profit to mother was 0.149 billion yuan, a year-on-year decrease of 17.05%, after excluding share payment fees from the equity incentive plan, -6.16% year over year; net profit without return to mother was 0.126 billion yuan, a year-on-year decrease of 23.74%. The results were in line with our expectations. On a quarterly basis, the company achieved revenue of 0.82/1.392 billion yuan in 1Q/2Q24 respectively, +1.77%/-6.88% year on year, and net profit to mother 0.047/0.102 billion yuan, or -8.38%/-20.54% year on year.

Development trends

1. The retail business is under pressure, and stores continue to expand. The company is based in Anhui and continues to advance the strategy of going north, west, and going south, 1H24 to achieve: 1) By product: overall kitchen cabinet/custom closet/wooden door revenue 0.966/0.928/0.139 billion yuan, -3.73%/-5.86%/+6.88%, gross margin -0.47pp/+1.83pp/ -0.68ppt to 38.77%/40.86%/17.20%; 2) By channel: direct management/distribution/bulk/overseas revenue 1.75/1.166/ 0.606/0.086 billion yuan, -8.18%/-10.90%/+8.22%/+42.69% YoY, gross margin +0.11pp/ -0.31ppt/+2.22ppt/10.83ppt to 69.25%/35.99%/35.52%/25.21% year-on-year. As of 1H24, the total number of the company's stores had a net increase of 348 to 4,931 stores, with overall kitchen cabinet/custom closet/wooden door distribution stores reaching 1,798/1993/1120 respectively, a net increase of 83/143/137 compared to the beginning of the year. The number of direct-run stores decreased by 15 to 20 from the beginning of the year. The overall number of stores maintained an expansion trend and continued to promote the national channel layout.

2. Gross margin declined slightly, and cost investment increased. The company's 1H24 gross margin was 36.69%, -0.12ppt year over year. Affected by advertising and equity incentive expenses, the company's expense ratio for the 1H24 period was 29.44%, +3.38ppt. Among them, the sales/management+R&D/finance expenses ratio was 16.86%/12.68%/-0.1%, respectively, and +1.31ppt /+0.25ppt. Under the combined influence, 1H24 net margin was 6.72%, year-on-year -1.07ppt.

3. The trade-in policy is expected to stimulate stock market demand and is optimistic about subsequent performance recovery and improvement. Recently, the state and various provinces and cities have actively issued policies to encourage the exchange of consumer goods, providing subsidies for trade-in. The scope of subsidies covers household appliances, home improvement, kitchen and bathroom, etc. We are optimistic about the incentive effect of this round of subsidies on the stock demand side. As more regional policies continue to be introduced and implemented, it is expected to improve the demand for home furnishings in stock and drive the recovery and improvement of the company's performance.

Profit forecasting and valuation

Considering the pressure on demand for home improvement, we lowered our 2024/2025 profit forecast by 10%/10% to 0.603/0.673 billion yuan. The current stock price corresponds to 7/6 times the 2024/2025 price-earnings ratio. Considering that the company is a leading home furnishing company, it is expected to benefit from the trade-in subsidy policy and maintain an outperforming industry rating. Considering declining market risk appetite and pressure on home improvement demand, we lowered our target price by 38% to 13 yuan, corresponding to a price-earnings ratio of 9/8 times 2024/2025, corresponding to 37% upward space.

risks

The decline in real estate sentiment has exceeded expectations, and market competition has intensified.