1H22 results in line with our forecast

Holike Creative Home announced 1H22 results: Revenue fell 8.42% YoY to Rmb1.40bn, attributable net profit dropped 9.39% YoY to Rmb125mn and recurring attributable net profit declined 14.37% YoY to Rmb112mn, largely in line with our forecast due to the impact of COVID-19 resurgence in some regions of China.

For 1Q22, revenue rose 8.35% YoY to Rmb615mn but fell 18.38% YoY to Rmb781mn in 2Q22. Attributable net profit increased 3.87% YoY to Rmb41mn in 1Q22 but declined 14.68% YoY to Rmb84mn.

Trends to watch

Comprehensive home-customization strategy continues; product mix upgrading. In 1H22, revenue from wardrobes fell 6.78% YoY to Rmb819mn, but gross profit for this segment rose 1.31ppt YoY to 38.67%. Revenue from cabinets increased 25.38% YoY to Rmb105mn, with gross margin (GM) rising 8.08ppt YoY to 28.63%. Revenue from wooden doors fell 19.18% YoY to Rmb363mn, with GM rising 1.34ppt YoY to 37.32%. Revenue from finished products fell 1.27% YoY to Rmb52mn, with GM improving 3.27ppt YoY to 27.10%. Revenue from doors and windows fell 50.90% YoY to Rmb14mn, with GM falling 24.67ppt YoY to -23.95%.

Improved production efficiency boosts gross profit; profitability remains stable. The firm’s 1H22 GM rose 2.09ppt YoY to 36.20% due to optimized production efficiency as it strengthened management of plants. 1H22 expense ratios climbed 2.93ppt YoY to 22.56%. Sales expense ratio grew 1.70ppt YoY to 10.65%. G amp;A and R amp;D expense ratio increased 1.16ppt YoY to 10.63%. Financial expense ratio grew 0.07ppt YoY to 1.28%. 1H22 net profit margin fell 0.10ppt YoY to 8.97%.

Retail business expanded; wholesale business structure continues to be fully optimized. Revenue from Holike Creative Home’s retail channel fell 4.91% YoY to Rmb1.02bn, but GM rose 1.68ppt YoY to 35.90%. The firm continued to expand its retail business to enhance its presence in the market. It launched a new “Huhulaizhuang”, focusing on the renovation of homes with a growing customer base. Revenue from wholesale business dropped 20.50% YoY to Rmb333mn, and GM rose 1.69ppt YoY to 38.17% in 1H22, thanks to the firm’s efforts to strengthen risk control and optimize customer structure. Hubei Qianchuan could be deconsolidated from 2H22 onwards, and we expect Holike Creative Home’s cash flow to improve and earnings to recover, as the firm completes the Hubei Qianchuan deal and refocuses on its main business.

Financials and valuation

We largely keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 11x and 9x 2022e and 2023e P/E. We maintain an OUTPERFORM rating and lift TP 20% to Rmb12, implying 12x and 10x 2022e and 2023e P/E with 9% upside, as the firm continues to upgrade its product mix, optimize its channel structure, and implement its comprehensive home-customization strategy.

Risks

COVID-19 resurgence in some regions in China; tighter-than-expected regulations on the real estate industry; intensifying competition.