Domestic artists lead the way, and their performance shows resilience. The company has four self-owned home textile brands, including Fuana, Viza, Cielo and Cool Qizhi, providing high-end artist textile products for consumers of all ages. The period before 2012 was a period of rapid development for the company. In 2013-2018, the company adjusted channels and cleaned up inventory, and the growth rate slowed. Beginning in 2019, the company deepened refined management and attached importance to profit assessment. The three-year epidemic resilience performance was excellent, and the operating income/net profit CAGR in 2019-2022 was +3.4%/+1.7%, respectively. 2023Q1-3 achieved revenue/net profit of 19.25/346 million yuan, -2.9%/+5.7% year-on-year.

The industry as a whole has entered a period of steady development, and the market potential for middle and high-end products is huge. ① China's textile industry developed rapidly in the early stages and has now entered a period of steady development. The size of the home textiles/bedding industry in 2021 was 2356/143.6 billion yuan respectively. ② There are a large number of white-label, low-priced products in the low-end e-commerce channel market. Vicious competition is intense, and sales are shrinking. Consumers are gradually paying attention to the quality and personalized design of home textile products. The middle and high-end product market is on the rise, and the average price of online product transactions is rising.

Create differentiated products, focus on channel cultivation, and lead profitability. Compared to Mercury Home Textiles and Rollei Life, which enhance brand power through the spokesperson model, Fuana creates a brand image through product design, development and store image, superimposes service capabilities, strengthens user stickiness, and uses time to build brand power.

① In terms of products, the company is characterized by artist spinning, incorporating classic elements from home and abroad such as Van Gogh, Monet, embroidery, and New Country embroidery to create distinctive characteristics of artist spinning. At the same time, it also develops products around the “three senses” of touch, body feel, and warmth, and is upgrading research and development in various materials such as “down materials”, “technological fabrics”, and “fiber materials” to continuously improve product quality. ② In terms of stores, the company improves the sales efficiency of direct-run terminals by opening large stores to upgrade the store image, refined service for VIP customers, and digital upgrades. At the same time, it also adopts a flat structure for franchisees, and provides support services for franchisees from various aspects such as brand image, store and product preparation, and management training. ③ The company's profitability is superior to the industry. In 2022, the gross margin of the Fuana/Rollei Lifestyle/Mercury Home Textiles direct sales channel was 66.53%/66.54%/51.73%, respectively, and the gross margin of the franchise channel was 52.65%/46.70%/36.80% respectively. Judging from the net interest rate level, the net profit margin of Fuana/Rollei Life/Mercury Home Textiles in 2022 was 17.3%/10.8%/7.6% respectively.

There are obvious differences in the channel structure of leading domestic brands, and different channel structure characteristics build the company's unique competitiveness. ① In terms of revenue scale, since Rollei Life focuses on franchise channel expansion and Mercury Home Textiles focuses on e-commerce growth, Fuana focuses on improving the quality of direct sales channels and is cautious in expanding franchise and e-commerce channels, so Rollei Life and Mercury Home Textiles's revenue scale is greater than Fuana's. In 2022, Rollei Life/Mercury Home Textiles/Fuana's revenue was 53.1/36.6/3.08 billion yuan respectively. ② Judging from the profit scale, Fuana focuses on profit assessment, and the profit margin is high, so the profit scale is close to Rollei Life. The scale is larger than Mercury Home Textiles. The net profit of Rollei Life/Fuana/Mercury Home Textiles in 2022 was 5.7/53/280 million yuan respectively. ③ Judging from the degree of revenue and profit fluctuations, Rollei Life and Mercury Home Textiles were greatly affected by the macro environment. The growth rate fluctuated more than Fuana. Fuana's profit level was relatively stable during the three years of the pandemic. In 2022, the net profit of Fuana/Rollei Life/Mercury Home Textiles fell 2.2%/19.6%/27.9% year on year respectively, and Fuana's profit stability was even stronger.

Long-term perspective: 1) From the perspective of stability, the scale and pattern of the home textile industry is stable, and the leading performance is steady. On the basis of maintaining the quality of profit, Fuana maintained a high dividend rate and achieved a high dividend rate. Fuana's dividend rate remained above 6.5% in 2018-2022, and the dividend rate rose to 8.49% in 2022. It actively gave back to shareholders. The high dividend rate in a volatile environment is worth paying attention to. 2) In terms of growth, there is still room to double the number of franchise stores. The company's direct operations are of high quality, which can empower franchise stores with direct management capabilities. Currently, residents of low-tier cities are moving closer to the quality of consumption in higher-tier cities, and consumption is constantly being upgraded. The number of 2023H1 Fuana/Rollei Life franchise stores is 991/2374, respectively. Compared to Rollei Life, Fuana franchise stores still have double the opening space, covering a deep range of low-tier cities.

Profit forecast: As a leader in the home textile industry, the company leads the market with excellent brand power and product power, innovative design technology, refined channel management, and aims for sustainable development, and has been resilient in recent years. We expect that in the future, with product upgrades and the expansion of franchise channels with high net interest rates, the net interest rate level will continue to rise. The company's net profit from 2023-2025 is expected to be 5.82/6.38/698 billion yuan, +9.0%/+9.7%/+9.3% year-on-year, corresponding to the closing price on November 6, 2023. PE is 12.2X/11.1X/10.2X respectively, maintaining the “increase in holdings” rating.

Risk warning: The competitive landscape of the industry worsens, channel development falls short of expectations, and the risk of inventory impairment.