Incident: Oupai Home released its 2024 semi-annual report. 24H1 achieved revenue/net profit/deducted non-net profit of 8.583/0.99/0.776 billion yuan, a year-on-year decrease of 12.81%/12.61%/27.54% year-on-year, and 24Q2 achieved revenue/net profit/net profit deducted non-net profit of 4.962/0.772/0.634 billion yuan respectively, a year-on-year decrease of 20.91%/21.26%/32.72%.

The real estate situation is severe and the business is under pressure, and 24Q2 Sanitary Ware achieved growth. By product, the company's 24Q2 cabinet/wardrobe and supporting furniture products/bathroom/wooden doors/other realized revenue of 14.90/25.12/0.28/0.272 billion yuan, a year-on-year change of -25.02%/-27.25%/+8.66%/-24.04%/+195.58%, accounting for 30.03%/50.64%/6.05%/5.49%, year-on-year change -1.65/-0.23/+ 4.01pct. By channel, the company achieved 24Q2 direct operation/ distribution/bulk/ other revenue of 1.86/3.776/0.804/0.089 billion yuan, a year-on-year change of -5.34%/-24.54%/-10.62%/+13.57pct, accounting for 3.74%/76.10%/16.20%/1.79% of operating revenue, and a year-on-year change of +0.62%/-3.66%/1.87% /0.54 pct. In terms of store opening, the net number of stores was 387 to 8,329 at the end of '23, including 5,644 Oupai brands (-369), Opal's 1037 (-41), Opal's 954 (-47), Bonis 539 (+74), and 155 others (-4). The decrease in the number of stores is related to factors such as adjustments to the company's dealer business plans, optimization of investment and distribution management policies, etc., and is characterized by short-term fluctuations.

Profit margins are continuously optimized, and profitability is improved. The gross margin of the company 24H1/24Q2 was 32.57%/34.46%, with a year-on-year change of +1.05pct/+0.19pct, mainly due to the full implementation of the company's 24H1 manufacturing multi-dimensional cost reduction, organizational optimization, and cost control measures. By product, the company's 24Q2 gross margin of cabinets/wardrobes and supporting furniture products/ bathroom/ wooden doors/ other products was 31.88%/37.50%/27.44%/30.67%/42.64%, a year-on-year change of +1.07/+0.53/-5.05/+2.23/ -9.69pct. By channel, the company's 24Q2 direct operation/distribution/bulk/other gross margin was 53.53%/32.84%/33.30%/53.12%, a year-on-year change of -7.03/-0.67/+0.01/+6.35pct. In terms of costs, the company makes double concessions to consumers and dealers, and strategically increases investment in brands and e-commerce drainage:

24Q2 Company Sales/Management/R&D/Finance Expense Ratio 11.24%/6.15%/3.90%/-1.06%, year-on-year change +2.74/+0.99/-0.12/+0.64pct. 24H1 Company Sales/Management/R&D/Finance Expense Ratio 11.39%/7.01%/4.87%/-1.27%, year-on-year change +2.44/+0.57/+0.41/+0.56pct. Net profit margin: The company's 24H1/24Q2 net sales margin was 11.57%/15.61%, +0.13/+0.03pct year-on-year.

Investment advice: The company comprehensively optimizes the product/price matrix, restructures the high-end series of Oupai products, complements the types of packages that need to be popularized, and at the same time initiates supply chain reforms to continue to reduce costs. The company has comprehensively promoted the transformation of the marketing system. As of 24H1, there are more than 850 effective retail stores: 1) obtaining demand traffic through private traffic, membership systems, and referrals from old customers; 2) insisting on using cities as operation centers and gradually implementing strategies to break the home market; 3) building a platform for dealer system interaction and empowerment. We believe that the company's long-term market share increase is highly deterministic. Considering that 24H1 household consumption demand falls short of expectations, we lowered our profit forecast: the company's net profit to mother for 2024-2026 is estimated to be 2.74/2.94/3.18 billion yuan respectively, a year-on-year change of -9.6%/+7.3%/+7.9%. The PE corresponding to the current stock price is 10/9/8X, maintaining the “recommended” rating.

Risk warning: Real estate and related demand fall short of expectations; household business progress falls short of expectations.