Text/Reporter Lei Xuan
Recently, Sophia passed the Shenzhen Stock Exchange with a fixed increase of 500 million to 600 million yuan to the actual controller.
On October 24, 2022, Sophia issued a private placement plan, planning to issue no more than 54 million shares, and the total amount of funds planned to be raised will not exceed 691 million yuan, which will be subscribed by the actual controllers and controlling shareholders Jiang Ganjun and Ke Jiansheng.
Subsequently, on February 28, 2023, Sophia adjusted the total amount of funds raised (including issuance costs) to no less than 500 million yuan and no more than 610 million yuan, and the raised amount was used to supplement the company's working capital and repay bank loans.
For the rationality of fundraising, Sophia gave three reasons: first, the continuous expansion of business scale brings capital needs, and the replenishment of liquidity is in line with the company's strategic development needs; Second, the company's asset-liability ratio increased from 30.35% at the end of 2019 to 51.37% at the end of September 2022, which is conducive to reducing the company's asset-liability ratio; Third, many home decoration, furniture, flooring companies have crossed over to the custom industry, and the company needs to expand its financial strength to cope with industry competition.
How big is Sophia's funding gap? In its reply to the exchange in May this year, it said that the company's capital needs totaled 4.122 billion yuan, including daily operating liquidity needs, payment of minority shareholders' equity transfers, fixed asset investment, repayment of short-term loans and cash dividends, and as of March 31, 2023, the balance of discretionary funds was 3.069 billion yuan, and there was a funding gap of about 1.053 billion yuan.
Source: Sophia's announcement
It is understood that the Shenzhen Stock Exchange will report to the China Securities Regulatory Commission to perform the relevant registration procedures in accordance with the regulations. If the private placement is successfully approved, Sophia's short-term financial pressure may be alleviated to a certain extent, but the long-term revenue and net profit growth, as well as the continuous optimization of the debt structure, still rely on the in-depth promotion of the "big home" strategy.
The debt ratio climbs and the funding gap of nearly 1 billion yuan needs to be filled
Sophia, which is in the first echelon of the custom home furnishing industry, has been performing well in terms of profitability and cash flow. Judging from the financial reports of the past 6 years (referring to the 2018-2022 annual report and the 2023 interim report), the monetary funds held by the company are 2.165 billion yuan, 1.340 billion yuan, 2.557 billion yuan, 2.710 billion yuan, 2.114 billion yuan and 2.674 billion yuan respectively, and the financial indicator "net present ratio" (the ratio of net operating cash flow to net profit) that reflects the quality of earnings continues to be greater than 1.
Source: Sophia's financial reports over the years
However, it is clear from the comparison between Sofia's short-term debt and monetary funds that its liquidity is under certain pressure. According to the 2023 interim report, Sophia achieved a net profit attributable to the parent company of about 500 million yuan during the reporting period, a year-on-year increase of 21.31%. The net cash flow from its operating activities was 1.42 billion yuan, a year-on-year surge of 858.28%; The balance of monetary funds at the end of the period was 2.674 billion yuan, an increase of 44.17% year-on-year.
At the same time, the liquidity risk data released shows that as of mid-2023, Sophia's short-term borrowings have reached 1.266 billion yuan, a significant increase of 44.36% compared with 877 million yuan at the end of 2022. Combined with other short-term liabilities such as notes payable and accounts payable, Sophia's total debt to repay in the coming year is as high as 3.814 billion yuan. Although the company has $2.674 billion in monetary funds on hand, this is still not enough to cover all short-term debt.
Judging from the financial reports of the last five years, although the company's monetary funds have risen steadily, the risk exposure to liabilities due within one year is increasing.
Source: Sophia's financial reports over the years
According to Sophia's announcement, the company's debt-to-asset ratio rose from 30.35% at the end of 2019 to 51.37% at the end of September 2022, and what is more interesting is that by the end of June 2023, this ratio increased again, reaching 54.3%.
Source: Sophia's financial reports over the years
The rising debt-to-asset ratio reflects the operational challenges faced by Sophia in recent years.
On the one hand, in order to respond to changes in the market and consumer needs, Sophia has increased its investment in the "big home" strategy. This not only means the continuous expansion of the category, but also includes a large investment in equity mergers and acquisitions and capacity expansion. The layout for long-term development has also brought short-term financial pressure.
On the other hand, Sophia is overly reliant on bulk business, and although it can quickly expand its market size, this strategy may lead to greater operational risks when the market environment is volatile.
Betting on large businesses exacerbates cash flow risk
In the golden age of real estate, custom home furnishing companies see bulk business as a booster of growth. In recent years, Sophia has rapidly increased the scale of its bulk business through strategies such as cooperation with top 100 developers and equity participation. According to public information, Sophia's bulk business revenue soared from 484 million yuan in 2018 to 1.510 billion yuan in 2020, with a compound annual growth rate of 76.28%. By 2021, the revenue generated by bulk business has accounted for 15.41% of the company's total revenue, ranking second, second only to the dealer channel.
However, the rapid expansion of the bulk business has also caused Sophia to suffer from "large customer dependence". According to public data statistics, from the proportion of the top five customers' total annual sales, Sophia is in the first echelon in the same industry - from 2018 to 2021, the proportions are 19.80%, 14.82%, 16.66%, and 17.52%, respectively, and the proportion of Opai has always remained below 9% in the same period, while Shangpin Home Delivery is even lower, no more than 5%. Over-reliance on large customers undoubtedly increases Sophia's risk when the market is volatile.
Source: Sophia's financial reports over the years
CSI Pengyuan pointed out that the bulk model is mainly manifested in cooperation with real estate enterprises, and its business essence is biased towards engineering construction, and there is a general phenomenon of capital advances; The bulk business is a bulk supply, and the profit margin is relatively low; Bulk business is generally settled by bills, and commercial bills are the majority, and some real estate companies will give a certain amount of preferential treatment when issuing commercial bills.
Under this model, the bargaining power of customized home furnishing enterprises is weak, and the revenue scale is rapidly increased in the short term, but the profitability is low, the collection is slow, and the attribute of advance capital continues to exacerbate the cash flow risk.
In the second half of 2021, real estate has entered a downward channel, and real estate companies that have successively exposed credit risks have dragged down customized home furnishing companies that are deeply bound to them.
Sophia's 2021 annual financial report shows that due to the problem of major customer due commercial acceptance bills in bulk business, the company has to make a total of 909 million yuan of impairment provisions for the receivables of the real estate company, and the proportion of bad debts is 80%. This move led to a sharp decline in the company's net profit for the year - the net profit attributable to the parent company was 123 million yuan, a year-on-year decrease of 89.72%, and the net profit attributable to the parent company after deducting non-profits fell by 96.98% year-on-year.
Sophia's management admits that this is the "heaviest blow" to the company. Despite this, Sophia's 2021 annual report still distributed a cash dividend of 6.00 yuan (tax included) to all shareholders for every 10 shares, completing a cash dividend of 544 million yuan. It was during this year that the company's debt-to-asset ratio climbed from 39.07% to a high of 52.23%.
It is worth noting that since then, Sophia has adjusted its bulk business strategy and returned to cautious development. In the 2021 annual report, Sophia said that the overall strategy of the bulk business is to make steady progress, continue to optimize the customer structure of the bulk business, focus on developing engineering customers with guaranteed payment ability, and simultaneously do a good job in risk control, accounts receivable recovery and risk management and control of notes receivable.
Under the tone of "seeking stability", Sophia's bulk business revenue in 2022 will be 1.529 billion yuan, a year-on-year decrease of 4.91%, accounting for 13.59% of the revenue. In the first half of 2023, the bulk business revenue will be 629 million yuan, a year-on-year decrease of 7.95%, and the proportion of revenue will further decrease to 13.47%. Sophia also pointed out that the main partners of bulk business are "many large real estate developers with good backgrounds (central enterprises, etc."), and such high-quality customers account for 55% of the revenue contribution.
In the face of the downward trend of the real estate market, the demand for bulk business has also weakened, which is bound to have an impact on the revenue scale of custom home furnishing companies in the short term. So, how to fill this gap in a short period of time and ensure stable revenue growth? Sophia is pinning its hopes on the "big home" strategy to further expand its business areas and diversify its revenue.
Increase the "big home" strategic investment or will continue to expand
Sophia, which started with wardrobes, first proposed the concept of "custom wardrobe" in 2001, and then, in 2013, the company further put forward the "big home strategy", which intends to comprehensively expand the business area, covering from bookcases, cabinets, wooden doors to sofas, beds, coffee tables, textiles, etc., aiming to provide consumers with a full range of home solutions.
In order to quickly expand the scale of the business and capture more market share, Sophia chose a strategy of cooperation and mergers and acquisitions.
IN JUNE 2014, SOPHIA INTRODUCED THE SIMI CABINET BRAND FROM FRANCE, AND COOPERATED WITH SCHMIDT GROUPE, THE LARGEST CABINET COMPANY IN FRANCE, TO SET UP SIMI COMPANY, WITH A REGISTERED CAPITAL OF 23.8 MILLION EUROS, WITH SOPHIA ACCOUNTING FOR 51% OF THE SHARES AND SG ACCOUNTING FOR 49%.
In April 2017, Sophia and Huahe Door Co., Ltd. jointly established Sophia Huahe Door Industry Co., Ltd., with a transaction amount of 547 million yuan, 51% of which Sophia holds and adopts a dual-brand operation model (Milana MILANA, Huahe).
This strategy did not deliver the expected profitability, and the growth of new product lines was slow, even having a negative impact on the company's overall financial position.
Although Sophia's revenue growth rate reached 18.66% in 2018, its net profit growth rate dropped to 5.8%. In 2019, this growth rate fell further, with the growth rates of revenue and net profit of 5.1% and 12.34% respectively, which is significantly inferior to the double-digit growth of 17% of Opai Home.
According to the 2019 annual report, the wooden door business, which relies on the dual brands of "Milana" and "Huahe", still accounts for single digits in revenue, accounting for only 2.44%; After 5 years of huge investment in Simi Cabinets in France, the revenue of this business accounted for only 11.07%. The traditional wardrobe business is still the company's main source of income, accounting for 80.35% of revenue.
Source: Sophia's 2019 financial report
Faced with the failure of the multi-category strategy, in 2020, Sophia decided to reposition its brand and return to its core business - customized wardrobes, focusing on improving the professionalism and refinement of the field in order to regain market share in this market segment.
The rapid rise of Opai Home Furnishing in the field of wardrobes has brought more pressure to Sophia. In 2020, Oppai Home Wardrobe and its supporting products will achieve a revenue of 6.803 billion yuan, surpassing Sophia's scale of 6.702 billion yuan.
In order to find a new breakthrough in the market competition, Sophia launched the "big home strategy" again at the end of 2021. Wang Bing, President of Sophia, said that Sophia will usher in the upgrade from cabinet customization to whole home customization, and proposed that the whole home customization strategy will be a strong growth engine in the key turning period to achieve the goal of 100 billion yuan in the future.
Since then, Sophia has continued to increase its home furnishing strategy, expanding its categories to 9 in 2022. In July, the "Sophia Doors and Windows" brand was launched, officially entering the door and window track; In October, it reached cooperation with the balcony brand Modern Forest and entered the balcony industry; In November, it announced that it would spend 343 million yuan to acquire the remaining 49% equity of Simi to further strengthen its layout in the cabinet market.
Looking at the financial data, the cash flow generated by Sophia's investment activities in 2022 was -881 million yuan, and in the first half of 2023, this figure has climbed to -824 million yuan. The continued negative investment cash flow shows Sophia's urgent need for expansionary investment in the process of promoting the big home strategy, and also hints at its urgent need for funds.
The wardrobe is still the main force of performance, and the strategic transformation has not improved
Gold Kitchen Cabinet and Zhibang Home Furnishing have successfully expanded from the cabinet business to whole-house customization, while Opai Home Furnishing will lead Sophia by nearly 3 billion yuan with a wardrobe revenue of 12.139 billion yuan in 2022. Sophia, on the other hand, although wardrobe is still its main pillar of performance, the growth rate has slowed down significantly; At the same time, attempts at multi-category expansion have not been as successful as expected.
The 2022 annual report shows that the revenue of wardrobes and their supporting products is 9.177 billion yuan, cabinets and accessories are 1.272 billion yuan, and wooden doors are 433 million yuan. Among them, as the absolute main force of performance, wardrobe revenue increased by 10.98% year-on-year, while cabinet and wooden door business revenue declined to varying degrees.
As for the first half of 2023, the revenue of wardrobes and their supporting products will reach 3.876 billion yuan, accounting for 81.72% of the total revenue, but a year-on-year decrease of 1.02%; the revenue of cabinets and their accessories was 481 million yuan, accounting for 10.15% of the total revenue, a year-on-year decrease of 10.66%; The revenue of wooden doors was 223 million yuan, accounting for 4.7% of the total revenue, an increase of 21.69% year-on-year.
Source: Sophia's 2023 semi-annual report
It is particularly noteworthy that cabinets were once the most important expansion category of Sophia, but in the 9 years since the introduction of the Simi brand, its revenue proportion has always hovered at a low level and continued to suffer losses. In 2022, Simi will achieve an operating income of 1.040 billion yuan, a decrease of 14% from 2020, and a net profit loss of 54.55 million yuan. In the first half of 2023, Simi's operating income further declined to 272 million yuan, a year-on-year decrease of more than 30%, and the net profit loss was 8.22 million yuan.
In addition, the revenue of the Huahe brand in 2022 will only be 169 million yuan, a year-on-year increase of 14.09%, but the loss will be 4.43 million yuan; In the first half of 2023, Huahe's revenue will further shrink to 69 million yuan.
Compared with Sophia's "multi-brand, all-category, omni-channel" strategy and its "whole family customization" goal aimed at comprehensively expanding market share, the current actual performance is still far from expectations.
Source: Sophia's 2022 annual report
Sophia once mentioned in the 2022 annual report that around the "big home" strategy, the Sophia, Milana, Simi, and Huahe brands will be expanded and upgraded. Under the iteration of the whole customization 3.0 strategy, the Sophia brand has developed the market of cabinets, bathrooms, doors and windows, and wall floors; The Milana brand sinks into the blue ocean market and upgrades the strategy of "a new generation of 5A hard-core whole family"; Simi brand new definition of "high-end whole home customization"; Huahe brand takes "Oriental aesthetics, starting from woodwork" as the core of the brand, and creates a high-end whole home customization with the integrated mode of doors and wall cabinets with oriental artistic conception.
This also means that Sophia's four major brands are crossing their traditional business boundaries to build a brand matrix covering high, medium and low market levels, and fully turning to the field of whole-house customization.
Sophia, Simi, Huahe, and Milana have entered the whole house customization track, which is undoubtedly beneficial to the increase in customer unit price. In the first half of 2023, the average customer unit price of the whole product such as customized wardrobes and cabinets will reach 40,737 yuan in the stores that have transformed the whole strategy. Sophia said that the effect of the whole strategy to increase the customer order value continues to be reflected.
In terms of future growth strategy, Sophia will mainly rely on increasing the average order value and opening up new channels. Among them, the four major brands have entered the whole house customization market, which is expected to significantly increase the unit price of customers. At the same time, Sophia also plans to cooperate with decoration companies to expand the scale of cooperation, as well as cooperate with third-party service platforms such as Shell to attract traffic.
Whole home customization has become a mainstream trend, attracting many home decoration, furniture and flooring companies to cross borders. As a result, the competition in the industry has become increasingly fierce. For Sophia, however, it was both a challenge and an opportunity. After this fixed increase, Sophia will receive new financial support, continue to optimize channels and management, and further promote the big home strategy, which will be waiting to be seen.