Matters:

The company announced its 2024 three-quarter report. In the first three quarters, the company achieved revenue/net profit after deduction of 0.67/0.01/-0.01 billion yuan, YoY -27.9%/-86.7%/from profit to loss; 24Q3 achieved revenue/net profit to mother/ net profit after deduction of 0.22/0.004/-0.004 billion yuan, YoY -39.2%/-87.0%/from profit to loss.

Commentary:

Dig deep into the potential of the customization & local reform market and actively expand the engineering business. In the first three quarters, the custom home furnishing industry was under pressure as a whole, and the company's revenue side faced a decline. By business, 1) Retail business: The company empowers dealers to build a “full case design+whole family customization” one-store dual-drive model to increase customer order value and order conversion rate. At the same time, the company increased its new retail localization layout to seize terminal traffic, and helped improve the market through cooperation with leading equipment companies. 2) Bulk business: The company strengthened the depth of cooperation with high-quality real estate partners such as state-owned and central enterprises, and continuously promoted diversified B-side business channels such as real estate package occupancy, hotels, medical care, schools and government public facilities. In the first half of the year, 20 high-quality dealers were added to the engineering channel.

Gross margin was under pressure in 24Q3, and the cost ratio increased year-on-year during the period. In 24Q3, the company achieved a gross profit margin of 24.2%, -7.0pcts/month-on-month +0.02pcts. We determined that the main reason was the decline in revenue, which prevented rigid costs from being diluted in the short term, hampering profitability. On the cost side, the company achieved a sales/management/finance expense ratio of 12.3%/7.0%/-0.1%, +1.5/+3.0/ -0.3 pcts year-on-year. Taken together, the company achieved a net interest rate of 1.73% to mother in the third quarter, -6.4 pcts year over year.

Investment suggestions: Q3 performance is under pressure. The company actively adapts to market changes. The retail side promotes the development of channels such as designer+new retail+e-commerce and assembly, and the engineering side strengthens the depth of cooperation with high-quality real estate partners such as state-owned and central enterprises, and the revenue side is expected to gradually stabilize. Meanwhile, the company temporarily shut down its Tianjin plant in 24Q3, and the pressure on the cost side may gradually ease. We expect the company to achieve net profit of 0.03/0.107/0.133 billion yuan in 24-26, corresponding PE of 56/16/13X. Referring to the relative valuation method, the company will be given 18 times PE in 2025, corresponding to a target price of 10.30 yuan/share, and maintain the “recommended” rating.

Risk warning: Demand recovery fell short of expectations, real estate sales declined, and channel expansion fell short of expectations.