Key points of investment:

The company released its 2024 three-quarter report, and the profit side continued to be under pressure, which was slightly lower than market expectations. 24Q1-3 revenue was 2.68 billion yuan (-2.6% YoY), net profit attributable to mother 0.21 billion yuan (YoY -16.8%), after deducting non-attributable net profit of 0.185 billion yuan (YoY -13.75%). 24Q3 single-quarter revenue of 0.88 billion yuan (-8.4% YoY), net profit to mother 0.064 billion yuan (YoY -22.8%), net profit excluding non-return to mother 0.053 billion yuan (YoY -32.7%), was dragged down by the consumer environment and was significantly pressured.

Gross margin is still bucking the trend, but the cost ratio has increased, leading to a weakening of profitability. According to the three-quarter report, 24Q1-3 has a gross profit margin of 41.4% (YoY +1.4pct), a period expense ratio of 32.4% (YoY +2.6pct). Looking at the breakdown, the sales expense ratio is 25.0% (+1.5pct yoy), the management expense ratio is 5.4% (+0.6pct), and the R&D expense ratio is 2.2% (+0.2pct yoy).

Ultimately, 24Q1-3's net profit margin was 7.8% (-1.3pct).

The strategy of “being comfortable, choosing Mercury” was deepened, focusing on major single product strategies. The company aims to drive the strategic implementation of all product categories through core product advantages and form a differentiated competitive advantage with peer brands. According to Euromonitor data, the company ranked first in sales nationwide for three consecutive years from 2021 to 2023. According to various annual reports, Mercury's 23 quilt category revenue was 2.02 billion yuan, an increase of 20.4% over the previous year, accounting for 48%, which is higher than the level of Fuanna/Rollei lifestyle quilt core revenue accounting for 40%/35%. Inventory at the end of the 24Q3 period was 1.21 billion yuan (+15.3% year over year), with 186 days of inventory turnover (+17 days year over year). There was a slight increase in the short term due to weak retail sales, but we believe that the company's core strategy and single product strategy will help improve inventory turnover efficiency.

Shanghai has further expanded the scope of consumer subsidies, and the home textile category has been included for the first time, which is expected to stimulate improvements in retail sales of leading brands. Shanghai has further expanded the scope of consumer subsidies. On October 22, the Shanghai Municipal Commission of Commerce announced that for the first time, the home textile category was added to the scope of the subsidy. Rolley/Fuana/Mercury are all participating. The three-day publicity period has ended. We believe that the release of consumer subsidies for home textiles mainly favors leading brands, and coincides with the Double Eleven promotion and the peak fall and winter season. After waiting for the subsidy measures to actually go live, it will have an effect on improving retail sales for listed home textile companies, which is worth looking forward to!

Mercury Home Textiles positions itself as a cost-effective technology home textile brand, in line with the current rising trend of pragmatic consumerism and maintaining a “buy” rating. However, considering the current consumption environment, we mainly lowered the revenue growth rate and gross profit ratio of each channel in 24-26, and raised the sales expense ratio, so we lowered our profit forecast. We expect net profit to mother of 0.33/0.38/0.43 billion yuan (originally 0.37/0.42/0.48 billion yuan) for 24-26, which is 8 times PE of 11/9/8 times. Referring to the average valuation of comparable home textile companies, and considering the year-end valuation switch, the target market value is 4.5 billion yuan, and the target market value is 4.5 billion yuan. There is room for a 26% increase compared to the total market value of 2024/10/29, maintaining the “buy” rating.

Risk warning: e-commerce dividends declined; domestic retail recovery after the epidemic fell short of expectations; commercial housing sales and wedding demand fell short of expectations.