Key investment points:

The leading track for middle and high-end mattresses is excellent, and the national supplement logic is smooth. Mu “The mousse product brand is deeply rooted in the hearts of the people, and the mattress industry has the logic of increasing penetration rate, replacement frequency, and concentration together. 1) Penetration rate. According to the company announcement quoting CSIL statistics, China's mattress penetration rate is about 60%, and there is still room for improvement compared to 85% penetration in developed countries. 2) Frequency of replacement. According to the company announcement, citing the “2021 New Mattress Consumption Trend Report” published by Red Star Macalline and 16 mattress brands, about 50% of Chinese respondents have used mattresses for more than 5 years, while about 70% of US households have changed their mattresses for 3 years. In the future, as Chinese consumers improve their awareness of healthy sleep and renewal, shortening the lifespan of domestic mattresses is expected to drive replacement demand. 3) Concentration. According to Euromonitor, the CR2/CR5 of China's mattress retail market in 2023 was 12%/18% respectively, which is significantly lower than the US level of 43%/60% respectively; furthermore, we believe that mattresses, as a relatively standardized and strong brand category in furniture, have the objective conditions to generate leading single products. Since Q4, home furnishing subsidies have been promoted. Since mattresses are relatively easy to replace, are easier to stimulate incremental demand compared to other furniture categories, and most regions require participating merchants to participate in formal contracts, formal invoices, and formal sales channels, leading companies that operate in compliance are expected to be the first to benefit.

A different view from the market: The market focuses on increasing the company's customer order value, but we believe that in the past two years, the company Alpha has not continued to increase customer order value, but rather broaden the customer base under strong brand endorsements. We believe that unlike other home furnishing companies, mattresses are a category with a lower decoration order, and the Mousse brand is positioned as high-end. Against the backdrop of the weak domestic consumption environment in recent years, it is difficult for the company to achieve a leap in customer order value; however, Mousse has excellent brands and strong channels, and has a good foundation for expanding the customer base. In September 2022, the company attracted professional managers to carry out management reforms, implement package sales, increase multi-category linkage rates, broaden the price range, and expand the customer base; in 2023, the company increased e-commerce development efforts, accounting for 18.5% of e-commerce revenue in 23, +4.8pct year on year; in the first three quarters of 2024, the share of e-commerce revenue further rose to 19.7%, and the company plans to increase to more than 20% in the future. At the same time, in order to cope with insufficient offline consumer demand, the company gave dealers more discounts on bed frames, sofas, etc., and increased the connection rate. The company's customer order value was stable year-on-year in the third quarter.

Profitability is stable, and the impact of changes in the business structure is expected to be manageable. Although the company's low gross margin category has continued to increase in recent years, it has had little impact on net profit margin, mainly due to: 1) the gross margin of the product mattress remains stable after excluding changes in direct supply to customers, and the company continues to strengthen cost reduction and efficiency; 2) gross margin increased significantly after the expansion of categories such as bed frames; 3) sales & management expense ratio optimization. We assume that in the future, the bed frame connection rate will rise to 1” (calculated, 0.65 in 23), the bedding ratio will remain at the average level for the past 3 years, the sofa will rise to 0.3 “(0.17 in 23 years), and the gross margin level of each category will remain unchanged for 23 years. We estimate that the corresponding comprehensive gross margin will drop by about 1.4 pct” (50.3% in 23 years). At the same time, since there is still room for scale effects and cost savings after the increase in the associated rate of bed frames, sofas, etc., and at the core, product mattresses adhere to the middle and high-end positioning, and e-commerce accounts for nearly 20%, we expect the company's overall net interest rate to remain at a good level in the future (14.4% in '23).

Profit forecast and investment advice: Currently, the company's stock price is 18X and 17X, which is higher than the average of comparable companies. Considering that the company is a leading domestic high-end mattress brand, has strong channels, and has a good foundation for category connections and customer base expansion, the industry has maintained strong profitability stability during the downturn period, and enjoys a certain brand premium. If real estate stabilizes further in Q4 and beyond, the Home Furnishing Insurance Policy continues, or boosts valuation and performance, the first coverage will give Mubai a character rating.

Risk warning: macro-environmental risk, increased risk of market competition, risk of brand operation and management