Key points of investment:

Jianlin Home Furnishing: Focus on the big health industry, leading the way to another peak with wisdom. The company was founded in 1990, built a professional manager system, and the executive team operated steadily. After 2018, it insisted on “technology-driven, health-driven, and brand-driven” three-wheel drive to reach the peak of its development strategy. The company mainly uses an OEM model. The business covers kitchen and bathroom products (showers, faucets, water intake and drainage, etc.), water purification products (water purifiers, water purification accessories), other household products (air treatment products, care products, home appliances, etc.), and non-household products (auto parts, etc.). The revenue share of the four categories of products in 2023 was 66.2%, 14.4%, 14.0%, and 4.8%, respectively. The company continues to deepen its international layout while strengthening domestic market development. Export sales and domestic sales revenue accounted for 77% and 23% respectively in 2023. The company's export business is expected to recover in 2024, and the domestic sales market is gradually gaining strength; I am optimistic about the company's performance growth and recovery.

Industry: Under the catalyst of inventory replenishment and interest rate cuts, exports such as kitchen and bathroom are expected to recover. Looking at US wholesalers and retail plus total furniture inventory, inventory peaked in June 2022. Consumption was under pressure under high overseas inflationary pressure in 2022 and 2023, mainly to absorb high inventories. Inventory in December 2023 fell 16% from the peak in June 2022. The total inventory for July 2024 increased by 3% compared to December 2023, as interpreted by the stock replenishment market. Meanwhile, the decline in existing home sales in the US has narrowed, furniture consumption is expected to pick up under interest rate cuts, etc., and exports such as kitchen and bathroom are expected to continue to recover.

Company: R&D and intelligent manufacturing build product advantages, and channel development provides growth momentum. 1) Product: Deeply involved in the kitchen and bathroom market, new product iteration+category expansion is expected to contribute to growth. The company is deeply involved in the kitchen and bathroom market. Kitchen and bathroom products are mainly showers and faucets. New product iteration+large customer penetration rate+new customer development, core business growth is expected to be restored; water purification products continue to have advantages in domestic sales, along with the expansion of production capacity at the Thai base, which is expected to strengthen the development of the export market; the company's product categories continue to expand, which is expected to gradually contribute to the increase. 2) Customers: Explore potential stocks, expand increments, and strengthen stickiness with localized operations. The company's overseas business is mainly in the North American market, and has gradually expanded the European belt market in recent years; with its advantages in multi-category operations and global layout, it actively explores customers such as kitchen and bathroom brands, retail stores, building materials wholesalers, etc., and accounts for 40.2% of the revenue of the first five customers in 2023; relying on US subsidiaries to strengthen localized operations, the competitive advantage of export sales continues to be consolidated; and at the same time, it leverages the advantages of the home supply chain to lay out cross-border e-commerce business.

3) Manufacturing: Deepen the global production capacity layout and improve operational efficiency by transforming digital intelligence. In addition to domestic factories, the company is expanding production capacity at the Thai base and preparing to build a Mexican base, and the profit of the Thai base is expected to increase as production capacity climbs; adhering to digital intelligence transformation, per capita income generation in 2023 will increase by 28.2% compared to 2019; 4) Domestic: The main foundry business is growing steadily, and engineering channels+independent brands are expected to expand. The ODM business continues to grow, and at the same time, the company is developing engineering channels such as housing, leasing, and health care to strengthen the construction of independent brands such as “Remo, Eriad, and Water Merlot”, which is expected to contribute to increased performance in the future.

Profit forecasting and valuation. We expect the company's net profit to be 0.513, 0.6, and 0.7 billion yuan respectively in 2024-2026, with year-on-year growth rates of 20.7%, 16.9%, and 16.8% respectively, corresponding to PE 10, 8, and 7 times, respectively. Under the comparable company valuation method, Jianlin Home Furnishing was given 14 times PE in 2024, corresponding to a market value of 7.2 billion, covered for the first time, and given a “buy” rating.

Risk warning: Overseas demand recovery falls short of expectations, and customer expansion falls short of expectations.