Key points of investment

Sophia Announces 2024Q3 Results

24Q1-Q3 revenue was 7.656 billion yuan (-6.64% YoY, same below), net profit attributable to mother 0.922 billion yuan (-3.24%), net profit not attributable to mother of 0.874 billion yuan (-3.55%).

2024Q3 had single-quarter revenue of 2.726 billion (-21.13%), net profit of 0.357 billion yuan (-21.16%), after deducting non-net profit of 0.343 billion yuan (-21.7%). The performance was mainly affected by poor consumption and poor completion.

By brand: Milana increased 15% in the first three quarters, and customer order value increased steadily 1) Sophia's main brand 24Q1-Q3 revenue was 6.89 billion (-6.84% YoY, same below), 24Q3 single quarter 2.447 billion (-21.55% YoY), and the customer unit price increased to 23,679 yuan/order.

2) Milana's 24Q1-Q3 revenue was 0.367 billion (+14.87% YoY), 24Q3 was 0.128 billion (-15.79% YoY), 579 specialty stores (+65 compared to the beginning of the year), and the customer unit price reached 14,731 yuan (+2.71% YoY).

3) Simi continued to transform the entire family. The number of stores during the reporting period was 161; the number of Huahe stores was 282.

By channel: 24Q3 assembly channels +7% year-on-year, maintaining growth 1) 24Q1-Q3 assembly channel revenue was 1.627 billion (+26%, same below), 24Q3 single quarter was 0.645 billion (+7%), and the revenue share increased to 24% (23Q3 was 17%). By the end of September, the number of cooperative assembly companies in the Direct Assembly Division reached 277 (221 at the end of 23, 256 in 24H1), continuing to develop cooperative assembly enterprises and expand urban coverage.

2) In addition to real estate customers, the bulk channel actively explores high-end hotel and residential apartment projects, and lays out overseas markets.

Finance: The gross margin performance was steady in Q3, and the sales expense ratio was properly controlled 1) Gross profit margin: 35.86% in a single quarter (-0.9 pct year over year); 2) Expense ratio: 24Q3 sales expense ratio -0.56 pct year over year, management+R&D expense ratio +1.05 pct year over year. We think the main reason is that expenses are relatively rigid and the revenue scale does not meet expectations. The financial expense ratio is -0.44pct year over year.

Profit forecasting and valuation

Sophia's business growth is driven by multiple factors. It is expected that operating efficiency will continue to be optimized and recommended continuously. We expect the company to achieve revenue of 10.888/11.523/12.356 billion yuan in 2024-2026, -6.67%/+5.84%/+7.23%, net profit to mother of 1.273/1.353/1.465 billion yuan, and +0.96%/+6.23%/+8.31% YoY. The current market value corresponds to a 24-26 PE of 14.38/13.53/12.50 X, maintaining a “buy” rating.

Risk warning

Real estate market recovery falls short of expectations, industry competition intensifies, channel construction falls short of expectations, etc.