Incident: The company released its 2024 semi-annual performance report. The announcement showed that in 2024H1, the company achieved total operating income of 8.583 billion yuan, a year-on-year decrease of 12.81%, and realized net profit of 0.99 billion yuan, a year-on-year decrease of 12.61%; 2024Q2 achieved total operating income of 4.962 billion yuan, a year-on-year decrease of 20.91%, and achieved net profit attributable to mother of 0.772 billion yuan, a year-on-year decrease of 21.26%. billion yuan, down 32.72% year over year.

The 24H1 complete channel continues to grow, and the direct management channel continues to grow well while adhering to the household strategy. The company's 2024H1 retail distribution channel/complete channel/bulk channel revenue was -23%/+8.7%/+1%/+27%, respectively. The obvious decline in the company's retail distribution channels is the main reason for the pressure on the company's revenue. It is expected to be affected by weak overall demand in the industry on the one hand, and by the company's business adjustments on the other. On the category side, revenue declines for cabinets/wardrobes & accessories & wooden doors all expanded further, falling 25%/27%/24% year-on-year respectively, and bathrooms still achieved 8.7% growth. The growth of direct sales channels is still impressive. It is expected to be related to the continuing effects of the company's early cultivation of the retail household business, helping the company's direct sales channel to achieve growth during difficult periods in the industry. The company has more than 850 active retail stores, an increase of more than 200 since the beginning of the year.

Under improving quality and efficiency, the company's overall profitability has remained stable, and internal skills have been refined to strengthen long-term competitiveness.

The company's 24Q2 gross margin increased 0.2 pct to 34.5% year on year, sales/management/R&D expense ratios were +2.7/+1.0/-0.1 pct year on year, respectively, and the net profit margin to mother fell only 0.07 pct to 15.6% year on year. Despite pressure on the revenue side, the company continues to practice internal skills:

① Marketing side: Comprehensively promote the pace of transformation of the marketing system, fully implement the burden on dealers; increase online channel investment, achieve an increase of more than 10% in online business with 24H1, achieve a 10% year-on-year increase in the number of effective centralized e-commerce customers, empowered more than 4,000 dealers with traffic, and enabled 13,600 cloud stores to launch through a joint operation model with dealers, and enabled dealers of all types in over 100 cities to carry out localized joint launches. Online customer acquisition increased by more than 600% year-on-year, and the number of e-commerce customers attracted 89 year-on-year %.

② Delivery side: Continuously carrying out trunk line integration and optimization work. 24H1 has signed trunk line integration agreements with trunk line integration carriers in more than 300 cities, accounting for more than 97% of the integrated cities, and the cargo volume covered by trunk line integration accounts for more than 90% of the company's total cargo volume; continuously optimizing the freight shuttle schedule, the proportion of goods covered by the company's shuttle system has stabilized at 90%, and the shuttle punctuality rate has stabilized at 90%; the company's overall shipping loss rate has decreased by more than 30% year on year; the TIMS system dealer training coverage rate exceeds 98 %, the actual scan rate of the TIMS system exceeds 93%.

Profit forecast and investment advice: We expect the company to achieve total operating income of 21.197/22.651/24.612 billion yuan in 2024-2026, respectively, and achieve net profit of 2.752/2.976/3.378 billion yuan, respectively, -9.35%/+8.15%/+13.50%, respectively. The PE corresponding to the current stock price is 9.82X/9.08X/8.00X, respectively, maintaining the “recommended” investment rating.

Risk factors: Real estate development falls short of expectations, increased market competition, risk of large fluctuations in raw material prices, risk of channel expansion falling short of expectations