1H24 results were slightly lower than our expectations

The company announced 1H24 results: 1H24 achieved revenue of 0.923 billion yuan, a year-on-year decrease of 5.06%, net profit to mother of 0.045 billion yuan, a year-on-year decrease of 46.9%, after deducting non-return net profit of 0.03 billion yuan, a year-on-year decrease of 48.85%. Excluding the amortization expenses of employee stock ownership plans, net profit not attributable to mother declined by 28.82% year-on-year.

Due to increased competition in the market and insufficient consumer confidence, the performance was slightly lower than our expectations. On a quarterly basis, the company achieved revenue of 0.403/0.52 billion yuan in 1Q/2Q24 respectively, +15.86%/-16.7% year-on-year, and net profit of 0.013/0.032 billion yuan, respectively, and +5.35%/-55.55% year-on-year respectively.

Development trends

1. The cabinet category continues to grow, and the wardrobe and wooden door categories are waiting to pick up. Affected by short-term pressure on terminal household consumption, the company's sales revenue in various categories was divided. By product, 1H24 achieved: 1) Overall wardrobe: revenue 0.662 billion yuan, -8.71% YoY, gross margin -0.25ppt to 39.01%; 2) Cabinet: revenue 0.141 billion yuan, +18.25% YoY, gross margin -0.11ppt to 27.01% yoy, mainly due to the increase in bulk channel revenue; 3) Wooden doors: revenue 0.033 billion yuan, YoY- 8.24%, gross margin +4.99ppt to 26.04%; 4) Finished product package: revenue 0.044 billion yuan, +5.32% year over year, gross margin -6.70ppt to 16.79% year over year. We believe that as the company's household strategy continues to advance and products continue to be iteratively upgraded, performance is expected to gradually recover.

2. Gross margin has remained stable, and cost investment has increased. The company's 1H24 gross margin was 35.03%, -0.84ppt year over year, and remained relatively stable. Affected by the amortization of incentive expenses, the company's expense ratio for the 1H24 period was 30.59%, +2.34ppt. Among them, the sales/management+ R&D/ finance expenses ratio was 14.56%/14.41%/1.62%, respectively, and +0.93pp/+1.49pp/-0.08ppt. Under the combined influence, 1H24 net margin was 4.86%, -3.83ppt year over year.

3. The bulk channel is developing steadily, and the overall channel is growing at an impressive rate. The company adheres to omni-channel operation and focuses on a single category operation model. By channel, 1H24 achieved: 1) Distribution: revenue of 0.714 billion yuan, -11.97% year over year, gross margin +0.21ppt to 38.02% year over year, mainly affected by lack of consumer confidence in the home retail market; 2) Direct management: revenue 0.036 billion yuan, +0.09% year over year, gross margin -0.62ppt to 50.70% year over year; 3) Bulk: revenue 0.13 billion yuan, YoY +72.61% The gross margin was +0.78ppt to 35.48% year-on-year, mainly due to an increase in the completion and acceptance of housing enterprise projects; 4) Finishing: The company actively developed assembly channels and launched an “easy to install” construction service model, and revenue also increased by more than 130%. Looking ahead, with the implementation of trade-in policies in various provinces and cities, we believe it is expected to drive demand recovery, enhance consumer confidence, and drive the company's performance growth.

Profit forecasting and valuation

Considering the pressure on home improvement demand, we lowered our 2024/2025 profit forecast by 20%/20% to 0.2/0.22 billion yuan, corresponding to 11/10 times the 2024/2025 price-earnings ratio. Considering that the subsequent implementation of the trade-in policy, the company is expected to benefit and maintain an outperforming industry rating. Considering declining market risk appetite and pressure on home improvement demand, we lowered our target price by 20% to 8.5 yuan, corresponding to a price-earnings ratio of 15/14 times 2024/2025, with 33% upside.

risks

The decline in the real estate industry has exceeded expectations, competition has increased risks, and raw material prices have fluctuated sharply.