The company announced third-quarter results: Q3 revenue of 1.74 billion yuan, -5.6% YoY, -10.7% YoY; net profit to mother -0.01 billion yuan, -0.12 billion yuan YoY, -0.13 billion yuan. In the first three quarters, the company achieved revenue of 4.83 billion yuan, -8.5% YoY; net profit to mother was 0.03 billion yuan, -88.9% YoY. The company's third-quarter results fell short of our expectations ($0.12 billion), mainly due to intense competition, declining gross margin and increased asset and credit impairment losses. Considering the pressure on the company's short-term profitability, it was lowered to “hold”.

Price competition has narrowed, but the decline in revenue in a single quarter has narrowed. In Q3, gross margin declined both year on month 24Q3, but the revenue decline was 10.4 pcts narrower than in 24Q2. We expect that price competition in the sanitary ware market is fierce, and the company will change subsidy fees for dealers to price discounts starting this year. The company's gross profit margin for the first three quarters of 24 was 26.4%, year-on-year -3.0 pct, 24Q3 gross profit margin 25.3%, and -4.0/-3.2pct month-on-month. We expect prices to decline mainly for sanitary products, but we expect to improve the company's product structure and increase the overall price band as the share of smart products increases.

Expense rates increased slightly during the period, and net operating cash flow was still under pressure

The company's expense ratio for the first three quarters of 24 was 24.4%, +2.4 pct. Among them, the sales/management/R&D/finance expenses ratio was 7.4%/10.7%/5.6%/0.7%, respectively, -1.1/+1.1/+0.8 pct. The decrease in the sales expense ratio was mainly due to the company changing the subsidy fee for dealers to price discounts. The company's net operating cash flow for the first three quarters of 24 years was -0.5 billion yuan, -0.97 billion yuan year on year, and 0.09 billion yuan in Q3, -68.6% year over year, mainly due to a decrease in sales revenue and an increase in payment of various taxes and employee remuneration. Considering that Q4 is usually a peak repayment period, we expect Q4's net operating cash flow to improve month-on-month.

The supply rate of smart toilets continues to rise, and it is expected that the trade-in policy will drive demand growth. According to the National Bureau of Statistics, retail sales of construction and decoration materials companies above the quota in January-September '24 were 118.6 billion yuan, -2.6% year-on-year. The growth rate was -0.6 pct compared to January-August, and short-term demand is still under pressure. According to Aowei Cloud Network, the overall scale of supporting bathrooms in the January-August decoration market was 1.68 million units, compared to -23.7%. Among them, the scale of the supporting smart toilet project was 0.21 million units, -1.9% year-on-year, 53.3%, and +12.7pct. The smart toilet configuration rate bucked the trend, compounded by the continued introduction of trade-in related policies since this year, which is expected to drive the increase in demand for the company's smart toilets and other products.

Profit forecasting and valuation

Considering that price competition in the sanitary ware industry is still fierce, we lowered our 24-26 net profit forecast to 0.19/0.32/0.38 billion yuan (previous value: 0.41/0.48/0.57 billion yuan). Comparable company Wind's agreed average expectation corresponds to 17 x PE in 25 years. We believe that smart bathrooms still have greater potential for growth compared to the traditional home furnishing industry. The company should still have a certain premium compared to comparable companies, giving the company 25 x PE for 25 years, with a target price of 8.25 yuan. Considering that it will take time to repair the company's price and profitability, it will be lowered to “hold”.

Risk warning: The penetration rate of smart bathrooms has fallen short of expectations, store expansion has fallen short of expectations, key executives have left their jobs, etc.