1H22 results miss market expectations

Dare Power Dekor Home announced its 1H22 results: Revenue fell 6.6% YoY to Rmb3.33bn, net profit dropped 36.58% YoY to Rmb191mn, and recurring net profit fell 53.47% YoY to Rmb127mn, missing market expectations mainly because COVID-19 resurgence in some regions of China weighed on sales.

In 1Q22 and 2Q22, revenue fell 6.16% and 6.89% YoY to Rmb1.32bn and Rmb2.01bn, and net profit turned to a loss of Rmb22mn in 1Q22 and fell 7.55% YoY to Rmb213mn in 2Q22.

Trends to watch

Traditional products declined significantly, while emerging products grew rapidly in 1H22. 1) Medium and high-density boards: Revenue fell 10.18% YoY to Rmb639mn, and gross margin decreased 1.97ppt YoY to 9.55%; 2) Wood flooring products: Revenue declined 18.87% YoY to Rmb2.08bn, and gross margin decreased 3.97ppt YoY to 30.38%; 3) Wooden doors and cloakroom products: Revenue increased 70.32% YoY to Rmb33mn, but gross margin decreased 2.18ppt YoY to 25.59%; 4) Bamboo and stone-plastic flooring products: Revenue increased 120.95% YoY to Rmb553mn, but gross margin decreased 6.37ppt YoY to 16.58%.

Profitability declines; pay attention to the pace of recovery. In 1H22, gross margin fell 5.0ppt YoY to 24.13%. Expense ratio slipped 0.9ppt YoY to 18.15%. Selling expense ratio rose 0.1ppt YoY to 8.06%, administrative and R&D expense ratio stayed flat YoY at 10.61%, and financial expense ratio fell 1.1ppt YoY to -0.53%. Net margin dropped 2.7ppt YoY to 5.75% in 1H22.

Economies of scale continue to strengthen; strong brand and channel drive sales. 1) Production: Annual production capacity of flooring products has reached 80mn sqm, and annual production capacity of medium and high-density boards and particle boards has reached 1.55mn sqm. Cumulative production and sales volume of Dekor flooring products has exceeded 700mn sqm. The number of customers has topped 23mn. The company enjoys notable economies of scale; 2) Brand: The company continues to strengthen the brand equity of its Dare wood-based panels and Dekor flooring products. The brand value of Dekor reached Rmb75.79bn in 2022, ranking No. 1 in the home furnishings industry for many years; 3) Channel: The company has established a sound marketing network. The company has nearly 3,000 stores for Dekor flooring products, and has stepped up efforts to explore online channels at Tmall, JD, and Suning. We expect the company to continue to improve omni-channel customer acquisition along with the continuous innovation of the marketing model.

Financials and valuation

To reflect the business adjustment, we lower our 2022 and 2023 net profit forecasts 11% and 9% to Rmb552mn and Rmb646mn. The stock is trading at 9x 2022e and 7x 2023e P/E. We maintain an OUTPERFORM rating and cut our TP by 8% to Rmb11 (11x 2022e and 9x 2023e P/E), offering 26% upside.

Risks

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