Matters:

The company issued an annual report and quarterly report announcement: 2023 revenue of 13.51 billion yuan, +4.1% year over year, and return to mother/non-return of 1.03 billion yuan, -21.1%/-27.5% year-on-year. 24Q1 revenue was $3.14 billion, -3.4% year over year, and 35/370 million due to mother/withheld from mother, -22.9%/-12.0% YoY.

Commentary:

Home furnishing stores and shopping centers are two-wheel drive, focusing on growth opportunities in the home improvement market. By industry, the company achieved revenue of 69.4/55.6/4.1/0.6/550 million yuan in leasing and franchise management/product sales/decoration services/loan factoring interest/other businesses in '23, respectively, -11.8%/+31.7%/+12.7%/-26.1%/+22.1%, respectively.

Among them, 1) The decline in revenue from the store leasing and franchise management business is mainly due to the fact that the company reduced some rent and management fees for eligible merchants during the period, leading to phased revenue pressure; in 24, the company plans to gradually withdraw preferential policies and implement an investment model combining “sales share” and “one store, two systems”. It is expected that the investment rate will continue to grow steadily. 2) The second growth curve represented by shopping malls in the “China Business World” showed impressive results. In the future, commercial centers may develop using a “revenue sharing” model. The China Business Department Store plan will be transformed according to the “one store, one policy” principle, while the Chinese supermarket will focus on school supermarkets and micro supermarkets to explore the development of village supermarkets. 3) In '23, Lewu actually completed the R&D and refinement of the “scenario-based” assembly experience center and the “explosive” model room, and the product richness and flexibility were greatly improved; in '24, the company plans to focus on home improvement as a training track to cooperate with the promotion of the Assembly Experience Center. Taken together, the company achieved GMV of 117.6 billion yuan in 2023, +11.7% year-on-year.

The transformation of digital intelligence continues to deepen, and Dongwo's business performance is steady. The operation of the three major digital intelligent platforms, Dongwo, EasyHome, and Easyhome, achieved initial results. 1) Dongwo achieved GMV of 97.4 billion yuan throughout the year, an increase of 173% over the previous year. In the future, it will continue to cooperate with the “sales commission” and “one store, two systems” investment model transformation to successfully achieve digital intelligence upgrades. 2) At the end of 23, the number of registered users of designers worldwide exceeded 14.77 million, an increase of 19%; the number of design cases exceeded 32.686 million, an increase of 18.5% year on year; the number of models exceeded 12.44 million, an increase of 27.4% year on year. It is expected to be linked with the home improvement business in the future to increase the conversion rate. 3) Smart Home actually opened 57 new stores in '23, achieving annual sales exceeding 4.4 billion yuan, an increase of 58.4% over the previous year.

With 50 integrated stores planned in 24 years and an asset-light operating model, revenue contribution is expected to increase further.

Profitability was under pressure in the short term, and the expense ratio remained stable during the period. In '23 and 24Q1, companies achieved gross profit margins of 34.1%/36.7%, compared to -10.7%/-2.5% year-on-year, or there was a phased decline in rent and management fee revenue, which were mainly high gross margins. It is expected that gross margin will pick up after the concessions are withdrawn. The company's overall expense ratio was well controlled, with an expense ratio of 24.1%/20.6%, year-on-year -0.4/+0.4pct, of which 23-year sales/management/finance rates were +0.6/+0.1/-1.1 pct to 11.8%/4.3%/7.7%, respectively; 24Q1 sales/management/finance expenses rates were +0.4/+0.3/-0.3 pct to 8.0%/4.3%/8.0%, respectively. Overall, the company achieved a net interest rate of 9.6%/11.1% to mother in '23/24Q1, -3.1/-2.8pct year-on-year.

Investment advice: The company is a leading domestic pan-home chain store enterprise. It innovates “sales share” and “one store, two systems” models to increase investment rates; at the same time, accelerate digital and intelligent transformation to enable the layout of pan-home furnishing industry chains such as home improvement, design, and smart homes. Considering that downstream demand pressure still exists, we expect the company's net profit to be 14.3/15.7/1.71 billion yuan in 24-26, corresponding to the current PE price of 13/12/11 times. Using a relative valuation method, the 24-year PE is 18 times, corresponding to a target price of 4.1 yuan/share, and maintain the “recommended” rating.

Risk warning: The development of home furnishing stores falls short of anticipated risks, industry competition intensifies, and terminal demand falls short of expectations.