Incident: Gujia Home Furnishing released its report for the third quarter of 2024. 24Q1-3 achieved operating income of 13.801 billion yuan, a year-on-year decrease of 2.37%; net profit to mother of 1.359 billion yuan, a year-on-year decrease of 9.49%; net profit of 1.219 billion yuan after deduction, a year-on-year decrease of 10.67%. 24Q3 achieved operating income of 4.893 billion yuan, a year-on-year decrease of 6.94%; net profit to mother was 0.463 billion yuan, a year-on-year decrease of 19.92%; net profit after deduction was 0.438 billion yuan, a year-on-year decrease of 16.87%.

Domestic trade-in is expected to boost demand. Equity incentives show confidence. We expect Q3's domestic sales revenue pressure to continue and export sales revenue to continue to grow. 1) In terms of domestic sales, since “Certain Measures to Strengthen Support for Large-scale Equipment Renewal and Consumer Goods Trade-In” was issued on July 25, 2024, trade-in rules have been implemented in various regions. The company has responded positively to the government's call to vigorously promote “trade-in” activities for household products in Hangzhou, Kunming, Xiamen and other places. With the expansion of the areas where subsidies are implemented, the results are expected to gradually be reflected after Q4. 2) In terms of export sales, the company will specifically promote business development with major strategic customers in supermarkets, seize high-volume superior category orders, and contribute to the continuous growth of the entire foreign trade market; further enhance the rapid delivery capacity of the entire value chain and deepen cooperation with existing SPO customers; ensure a steady increase in the overall scale through deepening strategic cooperation with major customers, precise planning, enriching the product matrix, and playing a good exhibition role; on the basis of continuously improving various basic operating capabilities, accelerate the development of channel expansion and retail enablement capabilities to create overseas benchmark stores and pilot customized and software furniture stores, for Gujia's overseas business layout is a new growth point.

On September 23, the 2024 restricted stock incentive plan was announced. The total number of incentive recipients is 84. It is proposed to grant 9.84 million restricted shares, accounting for 1.20% of the company's total share capital, at a grant price of 11.84 yuan/share. The assessment target is that the net profit for 2025-2027 is not less than 100%, 105%, and 110.25% of the average net profit for the three years 2021-2023. This incentive plan is expected to bind the interests of core personnel and demonstrate the company's determination and confidence to grow against the trend under external pressure.

Q3 Gross margin is under short-term pressure, and cost control is relatively stable

In terms of profitability, 24Q1-3's consolidated gross margin was 31.88%, down 0.47 pct year on year; 24Q3 company's comprehensive gross margin was 29.80%, down 3.97 pct year on year. Q3 Gross margin continues to be under pressure. Our analysis is mainly due to the continuous adjustment of the regional structure, an increase in the share of export sales with low gross margin; and the short-term pressure on consumer profit levels due to the company's domestic sales. In terms of period expenses, the 24Q1-3 period cost rate was 20.08%, up 0.35pct year on year. Sales/management/R&D/finance expenses rates were 15.95%/2.16%/1.83%/0.15%, respectively, -0.28/-0.03/+0.45/+0.21pct, respectively. The 2024Q3 company's expense ratio for the period was 17.91%, down 2.69pct year on year, and the sales/management/ R&D/finance expenses ratio was 13.99%/1.73%/1.47%/0.72%, respectively, -2.45/- 0.45/+0.08/+0.12pct, respectively. Under the combined influence, 24Q1-3's net interest rate was 10.09%, down 0.54 pct year on year. In 24Q3, the company's net margin was 9.65%, down 1.36pct year-on-year.

Investment advice:

Gujia Home Furnishing's management team is excellent, the advantages of integrated software+customization development are gradually showing, the results of the reform of regional retail centers are gradually showing, and new high-potential categories are growing strongly, and future acceleration can be expected. With the optimization of the industry pattern, the market share is expected to increase further. We expect Gujia Home Furnishing's revenue for 2024-2026 to be 19.035, 21.051, 23.431 billion yuan, up -0.92%, 10.59%, and 11.31% year-on-year; net profit to mother will be 1.889, 2.056, 2.22 billion yuan, up -5.82%, 8.81%, 8.00% year-on-year, corresponding PE of 14.0x, 12.9x, 11.9x, for 24 years. The target price of 41.37 yuan will maintain the buy-A investment ratings.

Risk warning:

The risk that the development of new channels is not as good as expected; the risk of fluctuating raw material prices; the risk of increased industry competition, etc.