Brief performance review

On October 29, the company released its 2014 quarterly report. 24Q1-Q3 revenue/net profit attributable to mothers/net profit excluding non-return to mother were -6.5%/-23.8%/-28.3 to 3.68/0.27/0.23 billion yuan, respectively.

24Q3 revenue/net profit attributable to mothers/net profit excluding non-attributable net profit was -10.1%/-30.9%/-33.1% year-on-year to 1.46/0.12/0.11 billion yuan, respectively.

Management analysis

Due to multiple factors, Q3 revenue declined, and major channels were still resilient: 24Q1-3's direct operation/ distribution/ bulk revenue was -16.3%/-11.8%/+1.0% to 0.25/1.92/1.11 billion yuan, respectively, of which 24Q3 direct operation/distribution/bulk revenue was -30.0%/-13.2%/-6.7% to 0.08/0.75/0.5 billion yuan, respectively. The company actively develops products such as suitable for the elderly, enterprise apartments, and engineering solutions on mass channels to accelerate the expansion of high-quality new customers and demonstrate business resilience. However, distribution and direct sales channels are still declining, mainly due to the company's further adjustments to related stores in Q3, and the overall demand for the superposition industry is still weak. By product, the company's 24Q1-3 kitchen/clothes/wood revenue was -5.2%/-10.2%/+0.5% to 1.66/1.5/0.24 billion yuan, respectively. Of these, 24Q3 revenue was -7.1%/-16.5%/-7.2% to 0.7/0.58/0.1 billion yuan, respectively. The wooden door category performed relatively better. It is expected that the main reason is that, under the promotion of the overall strategy, wooden doors and kitchen cabinets are still expanding.

Active concessions caused the gross margin of kitchen clothes to decline, and impairment losses weakened: the company's 24q1-3 gross margin was -1.6 pct to 36.8% year on year, with the gross margin for kitchen/clothing being -2.0/-1.0pct to 41.6%/37.8%, respectively. It is expected that the main reason is increased competition in bulk channels combined with active concessions from the company's retail channels, while wooden doors showed a gross margin of 24Q1-3 +2.8 pct to 20.8% year over year. The overall gross margin of the 24Q3 company was -3.6 pct year on year to 37.0%, and the gross margin of kitchen/clothing/wood was -3.9/-5.6/+7.7 pct year on year, respectively. In terms of cost ratio, 24Q3 sales/management/ R&D were +3.5/+0.2/-0.6pct year-on-year, respectively, to 18.2%/5.1%/5.2%. Furthermore, the company's Q3 asset+credit impairment losses totaled only about 2.6 million yuan (about 0.06 billion yuan in the same period last year), and the related drag has begun to abate.

Pursuing scale orientation and stabilizing the distribution system, relevant positive signals are showing: the impact of weak real estate sales since this year has gradually spread to the level of household demand. In this context, the company actively seeks change, actively makes concessions, and pursues scale orientation through multiple channels, not only stabilizes the distribution system better, but also lays a solid foundation for the company to better grasp the opportunities of industry demand recovery in the future. In addition, the company's overseas market expansion is becoming more and more smooth, and the domestic furniture trade-in consumer subsidy policy is gradually being implemented. Positive signals are gradually showing, and the company's subsequent performance can be expected to rise steadily.

Profit Forecasts, Valuations, and Ratings

We expect the company's EPS for 24-26 to be 1.03/1.11/1.20 yuan, respectively. The current stock price corresponds to PE of 14/13/12 times, maintaining a “buy” rating.

Risk warning

The southern market is not expanding well; the price of raw materials has risen sharply; and the overall packaging channel is not expanding smoothly.