Matters:

The company released its 2024 mid-year report. In 24H1, the company achieved revenue/net profit attributable to mothers/net profit deducted from mother of 6.35/0.6/0.67 billion yuan, -0.9%/-30.4%/-23.0% year-on-year. In the second quarter of a single quarter, the company achieved revenue/net profit attributable to mothers/net profit excluding non-attributable net profit of 3.21/0.25/0.3 billion yuan, +1.7%/-33.3% year-on-year.

Commentary:

Store business: The main home furnishing industry is showing steady performance, and international expansion is accelerating. By business, leasing and its management/product sales/franchise management/renovation/loan factoring interest each achieved revenue of 30.3/28.0/0.21/0.12/0.02 billion yuan, or -8.5%/+16.9%/-20.1%/-32.3%/-40.3%. The main reason was that the company reduced some rent and management fees for eligible merchants, leading to phased revenue pressure. Looking ahead to the whole year, the company will fully implement the “sales share” and “one store, two systems” investment strategies to accelerate the transformation and upgrading of home stores towards smart home experience centers, which is expected to drive a continuous increase in the investment rate. On the store side, the company opened 2 new direct-run stores and 3 franchised stores in the first half of the year; 7 new franchised stores were opened and 14 closed; as of 24H1, the company had 85/324 direct-managed/franchised stores, which was basically the same as at the beginning of the year. In terms of internationalization, the company made concerted efforts online and offline. In the first half of the year, it opened new stores in Phnom Penh and Macau, with an investment rate of 96% +; online, it focused on “new homes” and “actual designers” to expand customers, and may continue to contribute more in the future.

Shopping center business: The second curve is high revenue growth, and the business model is constantly being improved. In 24H1, the company's shopping center business achieved revenue of 1.27 billion yuan, +193.7% year-on-year, and passenger traffic reached 20.44 million, or +156.3% year-on-year.

At present, the company has organically integrated the smart home experience center into the shopping center business, and through the operation of a unique commercial IP, it provides rich social and leisure and entertainment experiences for young people and families.

Digital intelligence business: transformation is progressing steadily, and performance contribution is improving. The company reached strategic cooperation with Huawei and Volcano Engine. The digital and intelligent transformation of the home has ushered in an accelerated pace. 1) Dongwo is the company's basic digital market. GMV was +11.8% year-on-year to 46.6 billion yuan in the first half of the year. 2) The designer actually had more than 16.16 million registered users worldwide at the end of the second quarter (up 19% year over year). In the future, it is expected that “3D design” will be fully advanced through cooperation with Volcano Engine, continuing to empower home improvement and overseas business expansion, and increase conversion rates. 3) Smart Home actually uses an asset-light model and achieved sales of 2.25 billion yuan in the first half of the year, +30.6% over the same period last year. As of 24Q2, Smart Home has opened 128 stores in 15 provinces and cities across the country (11 new stores opened in the first half of the year), over 200 cooperative brands, and over 0.2 million connected devices.

Profitability is affected by the revenue structure, and the expense ratio continues to improve. 24H1 achieved a gross profit margin of 33.3%, -3.9 pcts year over year. The main reason was an increase in the share of revenue from the sales business of low margin products, and the gross margin of the leasing and franchise management business stabilized. On the cost side, the company achieved a sales/management/finance expense ratio of 8.9%/3.9%/8.1% in the first half of the year, -0.5/-0.3/-1.0pcts year-on-year. Overall, the company achieved a net interest rate of 9.5% to mother in 24H1, -4.0pcts year over year.

Investment advice: The company is a leading domestic pan-home chain store, innovating the “sales share” and “one store, two systems” models to increase the investment rate. Considering that downstream demand pressure still exists, we lowered the company's 24-26 net profit forecast to 1.23/1.34/1.46 billion yuan (the value was 1.43/1.57/1.71 billion yuan 24-26 years ago), corresponding to the current PE price of 12/11/10. Using a relative valuation method, the 24-year PE was 16 times, corresponding to a target price of 3.13 yuan/share.

Risk warning: The development of home furnishing stores falls short of anticipated risks, industry competition intensifies, and terminal demand falls short of expectations.