Key points of investment:

Three-stage leapfrog growth, focusing on customers and profit elasticity. Since its establishment in 2002, the company has upgraded its parts-finished product-ODM-OBM business, formed two core categories of smart electric sofas/beds, and reached cooperation with 40+ customers in the “Top 100 Home Furnishing Retailers in America”. Revenue has recovered rapidly since 2023Q2. Quarterly revenue was above 20% year over year. On the one hand, inventory removal in the US market progressed smoothly, and on the other hand, the number of new customers, the store-to-store model was effective, and the OBM contribution increased. In the first three quarters of 2024, revenue/net profit to mother achieved 1.849/0.431 billion yuan (+27%/+34%), and single Q3 revenue/net profit to mother achieved 0.642/0.146 billion yuan (+26%/+20%), and revenue continued to increase in double digits. The cost side is affected by tariffs, shipping, exchange rates, etc. The company has the ability to transfer costs and is hedged against exchange rates and interest rates. The comprehensive rate performance is excellent, and profits are on the rise. The net interest rate to mother increased from 12% in 2017 to 23% in the first three quarters of 2024.

The demands of rigidity and softness go hand in hand, and the two factors resonate. The smart electric sofa/bed was initially developed to provide nursing functions for special people with reduced mobility. It was used in B-side scenarios such as nursing homes and rehabilitation institutions, and extended to homes and hotels with the promotion of consumption upgrades and intelligent home appliances. As for smart electric sofas, the US started early and has a high penetration rate. China is in the early stages of development, user awareness is low, and the market size is small but the growth rate is relatively fast. The US market size/penetration rate is 11.5 billion US dollars/ 41%, and China 12.1 billion yuan/ 17%. Compared with smart electric sofas, smart electric beds started late, the market size is small, and the penetration rate is low. The US market size/penetration rate is 2.9 billion US dollars/ 15%, and China's 3 billion yuan/less than 1%. Currently, China's furniture exports to the US may be at the bottom of the cycle due to the fact that expectations of interest rate cuts are heating up and furniture removal is steadily advancing.

The company started with ODM, gradually completed product, cost and capacity verification, built a strong customer advantage, and strengthened the OBM business based on this. Compared with ODM, OBM is beneficial to enhance brand exposure, achieve consumer awareness, and open up room for growth. The company cultivates new brands through independent incubation. Currently, it has completed localized implementation and after-sales service. Terminal retail channels are developing and growing rapidly, and brand recognition by end users is still yet to be effective. At the same time, the company continues to explore potential growth paths, and looks forward to future changes from a star enterprise to a leading enterprise.

1) ODM, the company continues to invest in R&D, and the 6.13% R&D rate far exceeds that of its peers. It has built a comprehensive advantage in original product design (quarterly promotion of new products), excellent quality (after-sales service fee accounts for only 0.20% of revenue), cost control and delivery (achieving vertical integration of the supply chain and self-production of core components), and global layout (Vietnam base contributes about 80% of revenue), and has an excellent reputation and wide coverage among American high-end furniture manufacturers such as Ashley Furniture.

2) OBM, ① brand, MotoMotion is the core independent brand. The MotoLiving high-end series sofa series was developed by Jackson Carpenter, an outstanding designer in the American furniture industry, and has already had orders worth tens of millions of dollars. ② Service, ingenuity The United States is responsible for sales, warehousing and after-sales service in the local market, further narrowing the gap with local suppliers. ③ The channel is in the customer growth dividend period, and its excessive performance crosses the industry cycle. Among them, old customers formed the basic market, and new customers became an important increase. The penetration rate of the number of furniture retailers in the US reached 81.75%, and 34/68 new customers were added in the first three quarters of 2023/2024. The exhibition is low in cost and highly targeted, forming the company's main customer acquisition channel. At the same time, it enhances customer value through store-to-store services, makes up for the shortcomings of international logistics for small and medium-sized customers, and explores weak markets in the Midwest with expansion of exhibition space and regional management.

3) Intensive US furniture retailers lead the company's performance improvement, but they have yet to enter the top five in the industry, and there is huge room for growth. The company has taken exploratory experiments in terminal promotion, e-commerce, other overseas markets, domestic markets, etc., or brought a new round of development momentum.

Investment advice: Build product barriers and transform OBM to accelerate channel penetration. We expect the company's net profit to be 0.517/0.623/0.762 billion yuan in 2024-2026, respectively, with a year-on-year growth rate of 27.00%/20.32%/22.41%. The corresponding P/E is 19.50/16.21/13.24 times, covered for the first time, giving a “buy” rating.

Risk warning: weak macroeconomy, international trade frictions, innovation failure or backwardness, RMB appreciation, and rising freight rates.