Incident: The company released its 2024 mid-year report. 2024H1 achieved revenue of 8.583 billion yuan, -12.81% YoY, and realized net profit to mother of 0.99 billion yuan, or -12.61% YoY. Among them, 2024Q2 achieved revenue of 4.962 billion yuan, or -20.91% year-on-year, and realized net profit to mother of 0.772 billion yuan, or -21.26% year-on-year.

Direct and integrated channels are growing steadily, and retail distribution is under pressure. By channel, the 2024H1 direct-run store/dealer/bulk business achieved revenue of 0.335/6.395/1.499 billion yuan respectively, compared to +17.27%/-17.58%/+0.97%, respectively. Real estate transactions were sluggish in the first half of the year, and the scale of the custom home furnishing industry was under pressure. The company's retail distribution channel revenue was -23% year-on-year, and overall channel revenue increased 8.7% year on year, bucking the trend. By category, 2024H1 cabinet/ wardrobe and accessories/ bathroom/ wooden doors achieved revenue of 25.57/4.419/0.503/0.497 billion yuan respectively, or -16.76%/-18.63%/+9.29%/-13.61%, respectively. Among them, bathrooms achieved positive growth. In terms of stores, the total number of stores at the end of 2024H1 was 8,329, a decrease of 387 from the end of 2023. The number of effective retail stores in the company has exceeded 850, an increase of more than 200 since the beginning of 2024.

Cost reduction and efficiency are increasing in multiple dimensions, and profitability is steadily increasing. 2024H1 has a gross profit margin of 32.57% (+1.05pct). The company initiated supply chain system reform, optimized the comprehensive cost of supply chain management, and promoted changes in the information management model, and the gross margin increased steadily. On the cost side, the cost rate during 2024H1 was 22.00% (+3.98pct). Among them, sales, management, and R&D rates were +2.44pct/+0.57pct/+0.41pct to 11.39%/7.01%/4.87%, respectively. The increase in sales rates was mainly due to companies increasing spending on outdoor brand advertising, e-commerce drainage, etc. In the first half of the year, the company fully implemented the reduction of dealers' operating burdens, reduced the various operating costs of dealers, improved the cost structure of dealers' profit sheets, and boosted confidence in terminal operations. Taken together, the net interest rate of the 2024H1 company was 11.57%, +0.13pct year on year, with an overall steady increase.

Firmly strengthen the family strategy and practice internal skills in the face of adversity. Currently, real estate sales still need to be repaired, and effective demand is still insufficient. The company is firm in its big household development strategy, comprehensively promoting the pace of transformation of the marketing system through measures such as enabling traffic, adhering to the concept of using cities as the center of operation, and building a learning interoperability enabling platform, and strengthening the business capabilities of large homes in all aspects. The company continues to practice internal management skills, clarify management guidelines, improve management efficiency, and is expected to show business resilience.

Investment advice: Considering that current external demand still needs to be improved, we adjusted our profit forecast. We expect the company's net profit to be 2.94/3.25/3.6 billion yuan in 2024-2026, respectively, and the corresponding PE is 9.2/8.3/7.5 times, respectively, maintaining the “buy” rating.

Risk warning: risk of declining real estate sales, risk of rising raw material prices, risk of slowing household expansion