Incident: Q2 Competition in the industry combined with pressure on the profit side of a high base. The company 24H1 achieved operating income of 2.212 billion yuan, -3.85% year over year; realized net profit of 0.149 billion yuan, or -17.05% year on year; net profit of 0.126 billion yuan after deducting net income to mother, -23.74% year on year. On a quarterly basis, Q1/Q2 respectively achieved operating income of 0.82/1.392 billion yuan, up 1.77%/-6.88% year over year; realized net profit to mother 0.047/0.102 billion yuan, -8.38%/-20.54% year over year; net profit without deduction of 0.039/0.087 billion yuan, or -10.04%/-28.63% year-on-year.

Under pressure from the industry, distribution channels have maintained steady growth, and breakthroughs have been achieved in doorwall stores and performance. 1) By channel, retail channels are under pressure. Distribution, direct management, bulk management, and overseas sales revenue of 11.66, 0.175, 0.606, and 0.086 billion yuan respectively, were -10.90%, -8.18%, +8.22%, and +42.69% year-on-year respectively. 2) By category, cabinets, wardrobes, and wooden doors achieved revenue of 0.966, 0.928, and 0.139 billion yuan respectively, which was -3.73%, -5.86%, and +6.88% year-on-year respectively.

As of the end of 24H1, the company had 4,931 stores in various categories, including 1,798, 1993, and 1120 Zhibang wooden doors, respectively. Compared with the previous year, there were +83, +143, and +137, respectively. The number of wardrobe and wooden door stores grew rapidly.

The increase in expense rates during the period led to a decline in profitability. The company's 24H1 gross margin -0.11pp to 36.69% yoy; net sales margin -1.07pp to 6.72% yoy. The cost ratio for the period was +3.38pp to 29.44%; among them, the sales expense ratio was +1.83 pp to 16.86%; the management expense ratio was +1.2pp to 6.82%; the R&D expense ratio was +0.11pp to 5.86% year over year; and the financial expenses ratio was +0.25pp to -0.1% year over year. Looking at the Q2 single quarter, gross margin was -0.38pp to 36 year over year.

37%; net sales margin -1.26pp to 7.29% yoy. The cost ratio for the period was +3.55pp to 21.4% year over year; among them, the sales expense ratio was +2.05pp to 15.72%; the management expense ratio was +0.86pp to 5.54% year over year; the R&D expense ratio was -0.16pp to 5.25% year over year; and the financial cost ratio was +0.64pp to 0.14% year over year. 24H1's gross margin remained relatively stable, and the decline in profitability was mainly affected by the increase in expenses during the period. Among them, the increase in the sales expense ratio was mainly due to the year-on-year increase in the company's advertising and decoration fees and market service fees; the increase in the management expense ratio was mainly due to the increase in share payment expenses generated by equity incentives.

Cash flow is under pressure in the short term. In terms of cash flow, the company achieved operating cash flow of -0.257 billion yuan at 24H1. In terms of operating efficiency, the net business cycle was 123.61 days, up 21.6 days; among them, the number of inventory turnover days was 175.87 days, up 22.82 days; accounts receivable turnover was 21.71 days, up 6.39 days year on year; and the number of accounts payable turnover days was 73.97 days, up 7.62 days year on year. The decline in cash flow was mainly affected by an increase in accounts receivable and a decrease in contract liabilities.

Investment advice: The company implements full-space integration and multi-category collaboration to promote growth. Considering industry pressure to lower profit forecasts, we expect the company's net profit to be 0.563, 0.638, and 0.719 billion yuan respectively in 2024-2026. The original forecast was 0.66, 0.729, and 0.804 billion yuan, respectively. The corresponding PE was 8, 7, and 6X, respectively, to maintain a “buy” rating.

Risk warning: Risk of declining real estate sentiment and increased risk of industry competition.