1H22 results miss expectations

D&O Home Collection announced 1H22 results: Revenue fell 36.12% YoY to Rmb2.0bn, attributable net loss was Rmb249mn (vs. net profit of Rmb273mn in 1H21), and recurring attributable net loss reached Rmb263mn (vs. net profit of Rmb262mn in 1H21), missing expectations on Rmb68.24mn of provisions for credit and asset impairment losses and the firm’s efforts to reduce wholesale orders with high-risk customers.

Revenue fell 33.99% YoY in 1Q22 to Rmb765mn and 37.38% YoY in 2Q22 to Rmb1.23bn. Attributable net profit turned negative YoY and fell to -Rmb91mn in 1Q21 and -Rmb158mn in 2Q22.

Trends to watch

Revenue from ceramic tile business slumped; bathroom furnishing business grew steadily. In 1H22, revenue from ceramic wall and floor tiles declined 41.15% YoY to Rmb1.61bn, with gross margin falling 13.79ppt YoY to 15.45%. Revenue from bathroom furnishing products dropped 1.48% YoY to Rmb327mn, with gross margin falling 3.36ppt YoY to 25.19%. Revenue from acrylic boards increased 3.87% YoY to Rmb53mn. Sales of construction materials declined in 1H22 due to the impact of pandemic prevention and control measures in many regions. Meanwhile, the firm reduced shipments to some high-risk real estate clients, which led to a sharp decline in revenue from the wholesale channel in 1H22.

Raw material and energy prices remain high; profitability declined notably. Gross margin fell 11.7ppt YoY to 17.48% in 1H22. The firm raised the prices of some products in 1H22. However, its price hike strategy failed to mitigate the pressure from rising costs due to high raw material and energy prices. Expense ratio increased 10ppt YoY to 28.2% in 1H22. Specifically, selling, R&D, and financial expense ratios rose 2.8ppt, 4.6ppt, and 2.6ppt YoY to 12.83%, 11.13%, and 4.24%. Net margin dropped 21.2ppt YoY to -12.44% in 1H22.

Expanding omni-channel presence; customer structure improving. The firm has strengthened cooperation with high-quality real estate customers, reduced orders with high-risk customers, and acquired new clients outside the traditional real estate sector. The firm has stepped up efforts to enhance its omni-channel presence. It has continued to empower franchisees and enhance cooperation with home decoration companies in order to accelerate its penetration into the county-level market. The proportion of sales through distributors reached nearly 50% in 1H22. As of 1H22, Oceano (D&O’s subsidiary) had over 1,200 distributors and more than 4,000 stores, and Monarch had nearly 700 distributors and more than 1,500 stores.

Financials and valuation

Considering the firm’s efforts to adjust the client structure of its wholesale business and high raw material and energy prices, we lower our 2022 and 2023 attributable net profit forecasts from Rmb413mn and Rmb472mn to -Rmb97mn and Rmb265mn. The stock is trading at 11x 2023e P/E. We expect the increasing proportion of the company's retail business to drive earnings to stabilize in the future. We maintain OUTPERFORM and cut our TP 18% to Rmb9.00 (13x 2023e P/E), offering 17% upside.

Risks

Volatile raw material prices; tighter-than-expected real estate regulations; COVID-19 resurgence in some regions of China.