The company released the 24Q3 performance report. 2024Q1-Q3 achieved revenue of 13.801 billion yuan, -2.37% YoY, net profit 1.359 billion, -9.49% YoY, net profit not attributable to mother 1.219 billion, -10.67% YoY; achieved operating income of 4.893 billion yuan in a single Q3 quarter, 6.94% YoY, net profit 0.463 billion yuan YoY, -19.92%, net profit of non-return to mother of 0.438 billion yuan, YoY -16.87 %. The company's domestic sales were pressured by the downturn in the real estate market and the divestment of the Heavenly faction, and continued to lose money. Export sales maintained rapid growth under high base pressure. Strategically, they actively cater to the favorable real estate policy window and increase “trade-in” activities. It is expected that domestic trade will improve as domestic demand recovers.

The decline in domestic sales narrowed, and export sales maintained a steady increase. The company's sales continued to be under pressure in '24, and the decline narrowed in Q3, mainly due to weak domestic demand and the divestiture of the Tianxi faction at the end of '23. In terms of products, the company's two core categories of sofas and custom furniture were profitable and resilient in the first half of the year. The company adheres to the “one, two wings” strategy to promote software category operation innovation and retail transformation, integrating the opening speed of major stores to speed up the entire customized store; the 24H1 product side introduced a strategy of raising and lowering the price ratio, focusing on the “Huimin Project”, “Huishang”, and “698 Package”, and migrating and sniping products in the 899-1099 Huimin price segment. It is expected that domestic sales will improve with demand. Foreign trade performance was pressured by a high base and maintained rapid growth. Export sales revenue in the first half of the year was +12.6% year-on-year. Continuing to focus on major customers and expanding markets in key countries, the layout of the top 10 overseas production bases strongly supports the improvement of global supply chain efficiency, strong radiation, and the Q4 order boom can be expected to be maintained.

With increased trade-in promotions, cost control is better, and gross profit is expected to improve. The company stepped up trade-in activities to seize policy dividends, cover 920 regions, bear the cost of the whole process of replacement, and fully benefit consumers. The company's expense ratio for the first three quarters of 2024 was 20.1%, +0.4pct year on year. Among them, sales, management, R&D and financial expenses ratios were -0.3, flat, +0.4 and +0.2 pct year on year, respectively. Expense control is excellent, and the maturity of the company's financial management and internal operation efficiency is evident. The company's gross sales margin for the first three quarters was 31.9%, -0.47pct year on year. The main factors were: 1) changes in revenue structure and increased marketing efforts; 2) decreased revenue and increased cost-sharing; 3) terminal concessions to maintain market share.

Maintain a “Highly Recommended” investment rating. The company's foreign trade is growing steadily, domestic trade operations are declining, and it is expected to be boosted by policy influence. The core categories are generally steady, store expansion and household transformation are progressing smoothly, and internal operation capacity is good. Due to the weak impact of real estate and domestic demand, the profit forecast was lowered. We expect net profit to be 1.837 billion yuan, 2.012 billion yuan, and 2.141 billion yuan respectively in 2024 to 2026, -8%, +10% and +6%, respectively. The corresponding PE is 14.7x, 13.5x and 12.6x, respectively, maintaining the “Highly Recommended” investment rating.

Risk warning: Real estate sales fall short of expectations, increased competition, and improvements in domestic demand fall short of expectations