Global functional sofa leader, the profit performance in the first half of fiscal year 2023 exceeded expectations. The sales volume of the company's functional sofa ranks first in the world, and its business model has successfully changed from early export OEM to domestic independent brand sales. the domestic sales of brand products have reached more than 60%. It has 11 series of "Chihuashi", "first class" and "Nicoletti NICOLETTIHOME", which is well-known in China. The company's long-term operating performance is sound. In the fiscal year 2016-2022, the company's operating income and return net profit CAGR were 19.6% and 9.2% respectively. The company's profit grew against the trend in the mid-term of fiscal year 2023. Although the growth of domestic and foreign sales income slowed due to the domestic epidemic and overseas inflation, due to the high price of major raw materials, the company's profit reversed the trend. 1H23 achieved a gross profit of 38.8%, a year-on-year + 2.6pct, and a net profit of HK $1.092 billion, an increase of 10.5% over the same period last year.
Domestic sales channels focus on improving quality and efficiency, and there is a broad space to improve the permeability of domestic functional sofas. In terms of domestic sales, the company's domestic sales revenue CAGR reached 32.4% in the 2016-2022 fiscal year, significantly driving the overall growth of the company, and there is a broad space for long-term growth: 1) at the industry level, the current penetration rate of functional sofas in China is only 6.2%, which is still far from 48.4% in the United States, and the medium-and long-term industry is still in a dividend period of increased penetration. 2) at the channel level, the online and offline global layout, after the rapid opening of stores in the past few years, under the background of the rapid changes in the prosperity of the industry this year, the company's channel expansion has slowed down and focused store operation potential energy has been improved. through the new retail of dealers, drive the efficiency of single stores. As of September 30, 2022, the company has 6230 stores in China, with a net opening of 262 stores in the first half of the fiscal year. Speed up the layout of e-commerce and new channels online. During the Singles Day holiday in 22, Chivas achieved 1.28 billion yuan in sales of the whole network, ranking first in multi-platform sales of the same category. 3) at the product level, the company continues to expand its brand and product range, driving the diversification and rejuvenation of sofa products. In recent years, through the acquisition of brands such as style, Ester, Pliny, etc., the company has expanded leisure fabric, high-end Italian style and other diverse styles to cover a wider range of people. At the same time, the company relies on the basic sofa to expand to bedding, customized and other categories. At present, the main brands of bedding include "Chivas Smart bed" and "Chivas five-star mattress". The business income of bedding reached 65% in 2016-2022.
Export competitiveness is in the lead, and the global market share is expected to continue to increase. The company's products are mainly sold to the United States and Europe in contract manufacturing mode, with steady export growth, with revenue CAGR of 6.3% in fiscal year 16-22. In order to actively deal with tariff and shipping risks, the company actively built Vietnam-Mexico production capacity and enhanced its supply capacity to North American customers. In 2019, it ranked among the top three functional sofa manufacturers in North America with a market share of 10.8%. In the future, with the improvement of Mexican production capacity, the company is expected to further enhance product competitiveness and supply capacity to overseas customers by virtue of scale production, cost and other advantages, which is expected to drive the continuous increase of overseas market share.
Tamping the foundation is solid, looking forward to regaining the strong momentum of development, covering the "buy" rating for the first time. As the leader of the functional sofa, the company takes the lead in taking the lead in large single products, sharing the long-term dividend of the improvement of domestic functional sofa permeability, and the orderly expansion and steady development of various categories. Online and offline global layout, focusing on improving quality and efficiency of channels, with the gradual warming of the domestic consumption environment in the future, domestic sales are expected to regain a strong driving force for development. Export business relies on the advantages of global production capacity layout and industrial chain, the global competitiveness is increasing, and the market share is expected to continue to increase. We estimate that the company's net profit for fiscal year 2023-2025 will be HK $2.569 billion, HK $3.013 billion and HK $3.465 billion respectively, up 14.3%, 17.3% and 15.0% respectively over the same period last year. The company's current share price corresponds to a PE of 10x in fiscal year 2023 (22Univer fiscal year 23), giving a "buy" rating for the first time.
Risk factors: foreign exchange risk, raw material price fluctuation risk, market competition risk.