Results for 2023 and 1Q24 fell short of our expectations

The company announced its results for fiscal year 23 and 1Q24: revenue of 135.12/3.137 billion yuan in fiscal year 23, +4.08%/-3.38% year on year, net profit to mother of 1,300/349 million yuan, -21.1%/-22.88% year on year, net profit without return to mother of 1,23/373 million yuan, -27.5%/-11.96% year over year, lower than our expectations. The decline in the company's performance was mainly due to the slow recovery of the industry, putting pressure on merchant operations and reducing rent and management fee income with high gross margins. On a quarterly basis, the company's 1Q/2Q/3Q/4Q23 YoY +4.54%/-0.65%/+6.15%/+6.07% YoY, and net profit to mother -10.31%/-24.1%/-41.3%/+31.6% YoY.

Development trends

1. Leasing and franchise businesses are under pressure, and focus on investment model innovation to drive performance restoration. By business, revenue from rental management/product sales/franchise/decoration/platform services was -11.20%/+31.74%/-19.12%/+12.72%/+24.90%. In '23, the company's innovative investment model changed from “fixed rent” to “sales share”. We believe or deepen the binding of merchant interests and drive performance recovery.

2. Expenses rise due to business expansion, and gross margin is under pressure in the short term. Affected by rent and management fee exemptions, the company's gross margin for 23 was 34.11%, year-on-year -10.76ppt, 4Q23 gross margin was 31.81%, year-on-year -10.25ppt. On the cost side, the company's expense ratio for the 2023 period was 24.07%, year-on-year -0.35ppt. Among them, sales/management+R&D/finance expenses were 11.77%/4.58%/7.72%, respectively, +0.64pp/+0.08pp/ -1.07ppt. Under the combined influence, net interest rate in 2023 was 9.62%, -3.07ppt year on year, 4Q23 net margin was 3.96%, +0.77ppt year on year. Among them, the total revenue from asset disposal in 2023 was 831 million yuan, mainly due to the closure of stores and the transfer of direct-run stores to franchise stores in 23. We expect profitability to pick up as the company continues to promote digital intelligence transformation to help reduce costs and increase efficiency.

3. Actively embrace the transformation of digital intelligence and create a second growth curve. 1) Home Furnishing Store: Actively transforming into a smart home experience center. The first smart experience center in Tongzhou was opened in August '23, and 74 smart terminal brands were introduced. By the end of '23, the company had 414 home furnishing stores, including 86 direct-run stores (17 own+69 rental stores), 328 franchise stores, and 1,357 smart home brands. 2) Shopping center: Improve the “shopping center+department store+supermarket” layout to help create a second growth curve. As of '23, a total of 173 supermarkets/department stores were in operation, and 4 new shopping centers were opened. 3) Dongwo: Achieved GMV974 billion yuan in 23 years, an increase of 173.1%. A total of 934 stores were launched. The cumulative number of registered users increased by 95.48%, the average monthly activity was 3.9051 million, and additional branches outside Macau, Singapore and Cambodia were added to accelerate overseas travel. We believe that with the upgrading of the market format and opening up of models, and the transformation of superimposed digital intelligence, the company's performance is expected to pick up.

Profit forecasting and valuation

Considering the pressure on demand for home building materials, we lowered our 2024 profit forecast by 29% to 1,432 billion yuan, and introduced a profit forecast of 1,560 billion yuan for 2025. The current stock price corresponds to 13x/12x P/E. Maintain an outperforming industry rating. Based on profit forecast adjustments, the target price was lowered by 20% to 4.2 yuan, corresponding to 2024/2025 18x/17x P/E, with 38% upside compared to the current stock price.

risks

The market competes, channel expansion risks, and new business development falls short of expectations.