Putting aside the complex macro changes and the profit inflection point of the industry, a simple investment logic is to invest in leading enterprises, even unprofitable enterprises, such as the former Oriental Wealth (300059-CN), now Bilibili Inc. (BILI-US) and INNOVENT BIO (01801-HK). But not all leading companies are worth waiting for. The key is whether the track is long enough.

Huisen Home is a leading enterprise that is not worth waiting for. Although its compound profit growth rate reached 14.78% and 30.4% respectively in 2017-2019, there are signs that the overall industry space it belongs to has peaked and gradually shrunk. Therefore, even if Huisen can further increase the industry market share through economies of scale and excellent management to reduce costs in the future, it can not avoid the blow to the market under pessimistic expectations. Unless Huisen can open up new growth points.

Huisen home

It is impossible to know whether Huisen can open up new performance growth points in the future, but the current value base can be initially excavated.

Huisen Home is a supplier of panel furniture that produces and sells panel furniture in the original design and manufacturing way. they are panel furniture (TV cabinets, bookshelves, shelves, desks and coffee tables), soft furniture (sofas), and sports and leisure equipment such as table tennis tables, table football tables and billiard tables, of which panel furniture is the core source of income. Revenue accounted for 99.88%, 95.5% and 93.68% of revenue in fiscal year 2017-2019.

In product sales, Huisen is mainly sold to overseas retailers and distributors in the way of design and contract production, with the United States as the main sales market, accounting for 72.4%, 69.4% and 71.8% of revenue in the fiscal year 2017-2019. Walmart Inc, as the largest customer, accounts for 19.8%, 22% and 23.9% of revenue in the same period.

Huisen's competitiveness lies in its scale advantage and leading position. According to the export ranking of China's panel furniture market in 2019, Huisen's household market share reached 3.92%, far exceeding the cumulative market share of 1.81% of the 2nd-5th enterprises.

This lead should be attributed to Walmart Inc's endorsement. Overseas retail chains such as Walmart Inc tend to purchase panel furniture from limited suppliers and usually maintain a stable and long-term business relationship with approved suppliers because they use stringent and stringent procedures to select suppliers, so it is more expensive to switch to new suppliers.

Huisen Home has been cooperating with Walmart Inc since 2012, and its sales to Walmart Inc have continued to grow, from about 560 million yuan in fiscal year 2017 to about 892 million yuan in fiscal year 2019, with a compound annual growth rate of about 26.1%. At the same time, Huisen Home is Walmart Inc's only direct supplier of panel furniture in the Chinese market, it is obvious that Huisen Home does have its unique competitive advantage.

This advantage is mainly due to the cost of capital. First of all, Huisen's products cannot be compressed from the material side: Huisen's main production materials include particleboard and medium density fibreboard, accounting for 79%, 79.9% and 78% of the cost of consumables in the fiscal year 2017-2019. In the same period, the cost of consumables accounted for about 80.5%, 81.6% and 82.9% of the cost of sales.

In the case of difficult to reduce the cost of materials, Huisen also has the ability to grant a credit period of up to 90 days to export sales customers and up to 30 days to domestic customers. During the track record period, Huisen's average turnover days of trade receivables are 98 days, 91 days, 95 days and 102 days respectively.

This advantage constitutes a moat under Huisen's existing competitive conditions, but according to the author's recent thinking, this moat belongs to a "click" moat, and its profit growth mainly depends on the expansion trend under Walmart Inc bound by advantages. rather than through addiction, innovation, brand, channel-driven repurchase rate rise.

How far the expansion trend can go depends on how far the trade value of China's export wooden furniture market can go. According to the picture above, the panel furniture market has shown signs of decline since 2019. Although this shrinking trend is due to the transfer of some production lines of panel furniture manufacturers to Southeast Asian countries, such as Vietnam, where labor costs are lower than China, it is bound to have a negative impact on market evaluation.

At the same time, even without considering that Huisen did not expand the sales share of categories other than panel furniture, why did Huisen account for only 5.4%, 8.5% and 7.6% of revenue in the 2017-2019 fiscal year for such a huge panel furniture market in China? This at least shows that Huisen is stuck in the inertia dependence on the advantages of the United States, and lacks the courage and courage to attack the difficulties of innovation and risk bets in the Chinese market.

Summary

Generally speaking, Huisen Home is an enterprise with a bottom line of value, but it does not see any growth value that exceeds expectations. Therefore, for such enterprises, conservative investors can make dividend investments at the right time. As for growth or trend investment, we need to wait for Huisen Home's new actions to be evaluated.