According to Zhito Finance APP, CICC released a research report stating that considering the pressure on domestic sales, it downgraded Man Wah Hldgs (01999) FY25/FY26 net income attributable to the parent by 13%/18% to 2.422/2.697 billion Hong Kong dollars. The outperform rating for the industry is maintained, and based on adjusted earnings forecasts, the target price is lowered by 22% to 7 Hong Kong dollars. The company announced its mid-year financial results for FY2025: it achieved revenue of 8.305 billion Hong Kong dollars, down 7.1% year-on-year, with net income attributable to the parent of 1.139 billion Hong Kong dollars, up 0.3% year-on-year, and non-recurring net income of 1.27 billion Hong Kong dollars, down 1.4% year-on-year, which met market expectations. The company plans to pay a dividend of 15 Hong Kong cents per share, with a payout ratio of 51.1%.

CICC's main points are as follows:

1. Overseas markets are growing rapidly, while domestic sales are under pressure.

1) By country breakdown: In 1H25FY, revenue from China/North America/Europe and other overseas markets (excluding HG)/HG was 49.75/2.154/0.733/0.371 billion Hong Kong dollars, with year-on-year changes of -17.2%/+5.7%/+37.7%/+24.5%. The rapid growth in overseas markets is mainly attributed to sales growth due to market expansion, although ASP has been under pressure. 2) Domestic sales breakdown: In 1H25FY, domestic sales revenue from sofas/mattresses was 3.286/1.209 billion Hong Kong dollars, down 15.6%/-18.9% year-on-year, primarily affected by weak domestic demand; revenue from offline/online channels was 3.487/1.007 billion Hong Kong dollars, down 14.9%/-21.6% year-on-year. As of 1H25FY, the company had a total of 7516 domestic brand specialty stores, an increase of 280 compared to FY24, with a closing rate of about 4.7%.

2. Declining raw material costs have led to increases in both gross margin and net margin.

Affected by low stock prices for raw material purchases, the gross margin in 1H25FY was 39.5%, up 0.4 ppt year-on-year; due to increased marine transportation costs and sales personnel salaries, the sales expense ratio increased by 0.3 ppt year-on-year to 18.2%, while the management expense ratio decreased by 1.3 ppt to 3.8%, down 1.0 ppt year-on-year; the financial expense ratio was 0.88%, down 0.22 ppt year-on-year. Overall, the net margin was 13.7%, up 1.0 ppt year-on-year. The bank expects subsequent gross margins and net margins to remain relatively stable.

3. Expanding stores and increasing average transaction value are expected to drive performance growth.

Looking ahead to the second half of FY25, 1) Domestic sales: The company plans to add more than 200 new stores in the second half of the fiscal year. Under the influence of policies like trade-in, the company aims to boost sales of mattresses and sofas through increased bundled sales, and by supplementing materials and series products for different markets, the bank believes this is expected to drive sales and performance recovery; 2) Export sales: In the USA market, a low stock price promotion strategy was adopted in the first half of the fiscal year, with a sales growth of 18% and an increase in market share of about 6%. The bank believes that optimizing product structure in the future is expected to drive an increase in average transaction value and profit levels; the europe market is expected to maintain a double-digit growth trend by expanding cooperative retailers, developing technology products, and broadening inventory coverage.

Risk

Substantial fluctuations in raw material prices, real estate prosperity declining more than expected, overseas trade risks.