2021 results slightly missed our expectations

Dare Power Dekor Home announced its 2021 results: Revenue grew 20.46% YoY to Rmb8.75bn, attributable net profit fell 4.86% YoY to Rmb595mn, and recurring net profit declined 7.04% YoY to Rmb557mn, slightly missing our expectations. The firm’s revenue grew steadily, thanks to its improving competitiveness supported by superior product quality, growing economies of scale, and strong branding. However, its profit edged down due to a lower gross margin amid rising raw material prices. The firm has proposed a cash dividend of Rmb1.6 per 10 shares.

The firm’s revenue grew 86.8% YoY in 1Q21, 20.6% YoY in 2Q21, 21.6% YoY in 3Q21, and 0.2% YoY in 4Q21. Attributable net profit increased 227.9% YoY in 1Q21 and 7.8% YoY in 2Q21, but fell 34.0% YoY in 3Q21 and 41.5% YoY in 4Q21.

Trends to watch

Traditional business grew steadily; wooden doors and cloakroom business grew rapidly. Revenue from wood flooring products grew 14.9% YoY to Rmb6.12bn, with revenue contribution and gross margin at 70.0% and 31.3% （-2.2ppt YoY）。 Revenue from mid- and high-density boards increased 25.7% YoY to Rmb1.86bn, with revenue contribution and gross margin at 21.3% and 10.4% （-5.3ppt YoY）。 Revenue from bamboo and stone plastic flooring products rose 59.4% YoY to Rmb650mn, with revenue contribution and gross margin at 7.4% and 17.4% （-5.0ppt YoY）。 Revenue from wooden doors and cloakroom products surged 1,195.0% YoY to Rmb70mn, with revenue contribution and gross margin at 0.8% and 24.6% （+4.2ppt YoY）。

Higher raw material prices weighed on profitability; watch recovery of profit margin. The firm’s gross margin dropped 3.4ppt YoY to 26.1% in 2021, mainly due to higher raw material prices. Selling expense ratio grew 0.5ppt YoY to 7.6%. G&A and R&D expense ratio fell 1.3ppt YoY to 9.2%. Financial expense ratio declined 0.4ppt YoY to 0.6%. Net margin dropped 1.8ppt YoY to 6.8%.

Continuing with eco-friendly development strategy; competitiveness improving on excellent product quality, growing economies of scale, and strong branding. The firm has adhered to its strategy of developing an eco-friendly value chain. It continues to exploring innovative marketing strategies to increase the value of its two core brands, i.e. Dare for artificial board and Power Dekor for wood flooring. Based on its deep insights into customer needs, the firm has stepped up efforts in product R&D. It rolled out a variety of new products in 2021. The firm is diversifying its distribution channels to acquire retail customers, large corporate clients, and overseas customers. Meanwhile, it is leveraging digital marketing to empower its new retail business. We expect the firm’s overall business to grow steadily in the future.

Financials and valuation

Considering the firm’s ongoing business adjustments and high raw material prices, we lower our 2022 attributable net profit forecast 10% to Rmb692mn, and introduce our 2023 forecast of Rmb807mn. The stock is trading at 8x 2022e and 7x 2023e P/E. Given the adjusted earnings forecasts and changes in investors’ risk appetite, we maintain OUTPERFORM and cut our TP by 13% to Rmb14, implying 11x 2022e and 10x 2023e P/E and offering 33% upside.

Risks

Sharp fluctuations in raw material prices; fiercer competition.