Incident: The company announced its 2024 mid-year report. In the first half of 2024, the company achieved operating income of 2.212 billion yuan, a year-on-year decrease of 3.85%, and realized net profit to mother of 0.149 billion yuan, a year-on-year decrease of 17.05%. In the second quarter, the company achieved operating income of 1.392 billion yuan, a year-on-year decrease of 6.88%, and realized net profit to mother of 0.102 billion yuan, a year-on-year decrease of 20.54%.

Weak domestic sales put pressure on retail revenue, and the bulk business grew steadily. In terms of revenue by product, the company's overall kitchen cabinet/custom closet/wooden doors/other business achieved revenue of 6.50/0.545/0.094/0.103 billion yuan in the second quarter of 2024, respectively, -5.1%/-14.0%/+4.8%/+19.8% year-on-year. Affected by factors such as low prosperity in the real estate industry and weak domestic demand, the company's kitchen cabinet and wardrobe business revenue was under pressure in the short term, and the wooden door business achieved slight growth driven by the integration of the whole family and new stores. In terms of revenue channels, distribution/bulk/direct-management/overseas business achieved revenue of 7.09/0.459/0.078/0.043 billion yuan respectively, -15.9%/+7.8%/-25.7%/+24.3% year-on-year respectively. The growth rate of retail channels has slowed, the bulk business has grown steadily, and overseas business has gradually started up.

Gross margin declined slightly, and increased competition led to an increase in sales rates. The company's gross margin for the second quarter of 2024 was 36.37%, a slight decrease of 0.4 pct from the previous year. It is estimated that mainly due to weak domestic demand, the company made concessions, and at the same time, the share of large businesses with relatively low gross profit increased. By channel, the gross margin of the company's distribution/bulk/direct-management/overseas business was -0.6 pct/+1.7 pct/1.0pct/+18.9pct, respectively. It is estimated that the gross margin of the distribution channel declined slightly due to industry competition. The effects of improving the quality and efficiency of the bulk business were evident, and gross margin increased. The company's expense ratio increased by about 3.4 pct during the same period. Among them, the sales expense ratio increased by 2.0 pct over the same period. It is estimated that the main reason is that the company increased its online marketing efforts. The company's net profit margin for the second quarter of 2024 was 7.29%, a year-on-year decrease of 1.3 pct.

Seize the overall domestic consumer demand and actively explore overseas retail business models. In terms of the domestic market, the company follows the trend of integrated household consumption, innovates to build a fully integrated whole house, and vigorously develops complete channels through models such as the “Super Service State”. In terms of overseas markets, the company is actively exploring overseas retail business models and speeding up the layout of overseas retail stores. At the beginning of June, Shibong Home Furnishing's Tokyo store in Japan and the Philippine store officially opened, initially forming an overseas business model driven by B and C dual-core drivers and going hand in hand.

Based on the assumption that the revenue growth rate and gross margin will be lowered appropriately due to terminal demand and industry competition, the company's net profit to mother for 2024-2026 is 0.614/0.649/0.674 billion yuan, respectively (previously predicted 0.75/0.846 billion yuan for 2024-2025, respectively). The company was given a target valuation of $14.50 for DCF, maintaining a “buy” rating.

Risk warning

The risk that real estate construction falls short of expectations; the risk that channel expansion falls short of expectations; the risk of increased competition in the industry