1Q22 results miss market expectation

Dare Power Dekor Home announced its 1Q22 results: Revenue fell 6.16% YoY to Rmb1.32bn, attributable net profit turned negative YoY to -Rmb22mn, and recurring net profit turned negative YoY to -Rmb32mn, missing market expectation mainly because COVID-19 resurgence in some regions of China affected the firm’s production and delivery. We expect the firm’s earnings to gradually recover with the mitigation of the COVID-19 impact.

Trends to watch

COVID-19 headwinds weighed on production and supply chain, leading to a sharp decline in 1Q22 earnings. We expected the firm’s orders to see robust growth in 2M22. However, the COVID-19 resurgence in some regions has disrupted the firm’s production, logistics, and supply chain since March. We expect the negative impact to linger in 2Q22. With the easing of COVID-19 conditions, we expect the firm’s earnings to regain robust growth in 2H22.

Gross margin notably declined; watch improvement in profitability. The firm’s gross margin (GM) fell 6.38ppt YoY to 22.96% in 1Q22. Selling expense ratio dropped 0.07ppt YoY to 9.34%. G&A and R&D expense ratio grew 1.89ppt YoY to 15.10%. Financial expense ratio declined 0.19ppt YoY to 0.39%. Net margin fell 6.70ppt YoY to -1.66% in 1Q22.

Flooring business: Category expansion and product upgrading well underway. Based on its deep insights into customer needs, Dare Power Dekor Home has rolled out a diverse range of new flooring products. In terms of production, the firm has stepped up efforts to integrate production resources, optimize resource allocation, and transform into smart manufacturing. In addition, it has enhanced marketing efforts to help the brand attract younger customers. The firm is adopting various marketing strategies (e.g., livestreaming and content operations) to better meet the needs of specific groups.

Artificial board business under adjustments; management capability improved. Dare Power Dekor Home continues to optimize its organizational structure and refine various assessments to reduce procurement costs and improve manufacturing techniques. The firm has stepped up efforts to adjust its product mix and increase spending on new product R&D and promotion, thereby enhancing the influence of its artificial board brand.

Financials and valuation

Considering that the COVID-19 resurgence in some regions in China weighs on the offline consumption of home furnishings products, we lower our 2022 and 2023 net profit forecasts 11% and 12% to Rmb619mn and Rmb710mn. The stock is trading at 8x 2022e and 7x 2023e P/E. We maintain an OUTPERFORM rating, and cut our TP by 14% to Rmb12 (11x 2022e and 9x 2023e P/E), offering 37% upside.

Risks

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