(Report Producer/Author: Guotai Junan Securities, Chen Liyu, Wang Jia)
1. The home furnishing industry has a long chain of high value, and the prosperity is strongly correlated with demand
Household products mainly include the use of wood, metal, plastic and other materials to make furniture, with the functions of sitting and lying, storage, partition and so on. The characteristics of household products determine their important position in the economy and society, and the development of the industry is highly related to economic development and market demand.
1.1. Upstream: Wood and plastics are the main raw materials
Timber is the primary raw material, and the output demand structure is adjusted and fluctuated. Wood is one of the most important raw materials in the home furnishing industry, and the mainland is rich in forest resources, and the output of wood ranks among the top in the world. From 2018 to 2021, the timber output of the mainland showed a continuous growth trend, and due to the impact of structural demand adjustment and economic slowdown, the timber output of the mainland decreased by 7.73% in 2022 compared with 2021.
Plastic raw materials fluctuate under the influence of international oil prices. As one of the main raw materials for household products, plastic is favored by consumers because of its bright colors, light and compact, easy maintenance and low price. From 2018 to 2022, the overall trend of plastic products in mainland China has been fluctuating and rising, and since 2020, due to a series of factors such as the impact of the epidemic, the start of production enterprises has been blocked, the demand of downstream industries has decreased, and international oil prices have risen, and plastic production has been fluctuating and rising.
1.2. Midstream: Operational challenges and ample long-term space
Intensified competition in the industry has led to challenges in operating from a short-term perspective. Due to the fixed raw materials of the home furnishing industry, the low entry threshold of the industry, the fierce competition in the home furnishing industry and the large number of enterprises, with the development of the economy, the mainland has become the world's largest producer of home furnishing products. From 2018 to 2022, the number of enterprises above designated size in China's furniture manufacturing industry continued to grow, and the number of furniture enterprises above designated size in mainland China increased by 9.4% year-on-year in 2022. Affected by the price of raw materials, superimposed real estate pressure affects the competitive environment of the retail end, the recovery of retail sales of home furnishing enterprises is relatively slow, and the operating efficiency of enterprises is facing challenges in the short term.
The demand for high-quality products continues to increase, and the market has broad prospects. Smart home is becoming a new direction for the development of home furnishing products in the future. Smart home takes the house as the carrier, uses a new generation of communication information technology to realize the interconnection of system platforms and home products, and meets the intelligent life services of user information acquisition and use. Smart home has functions such as centralized management, remote function control, scene interconnection, and independent learning iteration, and the construction of intelligent home life scenarios can improve the comfort, safety, and convenience of home life. Smart home is a multi-technology integration of the field, covering the Internet of Things, automatic control, cloud computing, big data, artificial intelligence, information security and many other technologies, put forward higher requirements for home enterprises, but also the home industry to improve the industry concentration of opportunities. At present, the leaders of various industries are actively promoting the layout of the ecosystem, investing heavily in R&D to achieve technological breakthroughs, solve product pain points, and effectively improve the consumer experience. In addition to smart home, users also put forward higher requirements for comfortable, healthy and personalized home, which is not only a test for enterprises in the home furnishing industry, but also the momentum for future growth. Overall, the home furnishing industry still has room for development, and category integration is the key development trend. After completing the layout of related categories in their own fields, each enterprise actively penetrates into the rest of the fields. For example, custom home enterprises start from the customization of cabinets or wardrobes to complete the expansion of customized categories such as cabinets, clothes, wood, etc., and further extend to the software category; Consumers' one-stop purchasing service experience has been improved, which has led to the industry moving towards category integration.
1.3. Downstream: Diversification of channels and the rise of new media
The downstream demand of the home furnishing industry is mainly affected by the prosperity of the real estate industry, from the perspective of downstream channels, most of the finished home furnishing products are sold through furniture stores, e-commerce platforms and brand stores, with the development of information technology and the improvement of consumption concepts, e-commerce channels have become a new growth point for the channel side of the home furnishing industry with the advantages of lower cost and influence. With the slowdown in downstream demand growth, the home furnishing industry may enter the stock market stage. Consumers have put forward higher quality and service requirements for home furnishing enterprises, and leading home furnishing enterprises rely on competitive advantages such as products, channels, and supply chains to actively explore emerging development paths, continue to deepen the strategic layout of large home furnishings, and meet the one-stop needs of consumers through multi-category integration, and industry concentration is expected to continue to increase. The trend of digital transformation and the rise of young consumption cannot be ignored. The consumer structure is gradually getting younger, the purchase trend is changing, the young consumption is rising, and the market potential of the home furnishing industry is huge. Douyin and Xiaohongshu have become the fastest-growing content platforms in the home furnishing industry. At the same time, problems such as the relative dispersion of brands and the difficulty of accurate access to users have also become the key to restricting the explosion of market potential.
Household consumer behavior tends to be rational, and the information gap between buyers and sellers is gradually narrowing. Under the premise of diversification of household products and convenience of purchase, consumers will assist in decision-making through a variety of price and quality comparison methods when purchasing household products, and the consumption concept tends to be more rational. Home furnishing companies actively use new marketing methods such as short videos, live broadcasts, and group buying to enhance brand value communication.
2. Review: Shrinking valuations are putting pressure on stock prices, and valuations are at all-time lows
Stock price: In 2023, home furnishing companies will generally underperform the industry, with the leading companies Opai Home Furnishing falling 42%, Gujia Home Furnishing falling 16%, and Minhua Holdings falling 28%, with only a few home furnishing companies outperforming the industry. Performance: Judging from the performance disclosed in the 2023 interim report, home furnishing companies still show steady growth as a whole (revenue generally increased by 5%-10% year-on-year, and profit increased by 5%-15%), and the consensus expectation of wind's full-year growth in 2023 is also relatively stable. As a result, the decline in stock prices is driven more by the contraction at the valuation level. Valuation: From the perspective of historical PE quantile levels, the PE corresponding to the 2023 earnings expectations of home furnishing companies is basically in the bottom range of 5%-15% in history.
3. Attribution: The combined effect of real estate downturn expectations and industry competition
Reason 1 for valuation contraction: new real estate starts affect the expected growth rate of home furnishing performance. As the pillar industry of the industrial system, the rise and fall of the real estate industry has greatly affected the demand of the home furnishing industry. With the rapid development of the mainland economy and the continuous improvement of the urbanization rate, the real estate industry has developed rapidly, which has correspondingly stimulated the demand of the home furnishing industry. From 2016 to 2021, the sales of commercial housing in mainland China grew rapidly, and due to the impact of the epidemic, the sales of commercial housing in mainland China will decline in 2022, which will drag down the prosperity of the home furnishing industry. Taking the leading enterprise Opai Home Furnishing as an example, since the home furnishing industry belongs to the post-cycle sector of real estate, historical data shows that its valuation has a high correlation with the growth rate of residential starts, reflecting the logic of industrial chain boom transmission. Since May 2021, the growth rate of new residential construction has continued to be under pressure, and the market has gradually traded concerns about the marginal change in the future prosperity of the industry, and the valuation of home furnishing companies has entered a downward channel simultaneously.
Reason 2 for the contraction of valuation: downstream confidence is restored, supply is increasing, and competition is intensifying. After the epidemic, the consumption scene has been restored, furniture brands and channel dealers expect that the lagging demand for home consumption during the epidemic will be gradually released, entering a pro-cyclical market, and the recovery of foot traffic in home furnishing malls will further boost the confidence of the supply side expansion. Under the background of the recovery of consumer confidence, the channel & product & marketing of home furnishing enterprises has accelerated, the industry supply has expanded rapidly, and some leading companies such as Gold Kitchen Cabinet have maintained high net store openings in 2022, and the overall number of furniture manufacturing enterprises has also increased significantly in 22H2. Listed companies such as Gujia Home Furnishing and Gold Medal Cabinet still maintained a high level of store opening after the Evergrande incident, and the supply increased significantly.
Shareholding structure: The proportion of foreign ownership is basically consistent with the fluctuation of stock price. Since 2022, the shareholding ratio of the outstanding shares of the Shanghai-Shenzhen-Hong Kong Stock Connect has decreased to 14% from 31%+ in February 2022, and the stock price has fluctuated basically in line with the shareholding ratio, and since 2022, the shareholding ratio of Gujia Home Furnishing has remained 10%-12%, corresponding to relatively small stock price fluctuations, and the high point of foreign shareholding ratio was in June 2020 (18%). On the whole, the proportion of foreign ownership is basically consistent with the stock price trend.
4. Outlook: The top brands are resilient enough to operate, and their performance has grown steadily through the cycle
From the performance side of listed companies: home furnishing brands have the business resilience to go through the cycle. The market continues to trade concerns about completions in 2024. However, taking Sophia as an example, from the perspective of historical review, even in the period of year-on-year decline in real estate completion data in 2015, 2017, 2018 and 2022, the performance can still achieve steady growth. The performance of home furnishing brands with brand, product and channel advantages still has the business resilience of crossing.
From the perspective of the actual situation of the industry: the postponement of the delivery project in 2023 may support the actual completion performance. According to the statistics of Leju.com, there are still a considerable number of guaranteed delivery projects in a state of solidity, Changsha is more serious in the delay in delivery, Hangzhou, Nanchang, Ningbo, Wuxi and other cities are relatively large, more than half of the projects have been completed or have the estimated delivery time. Chengdu, Dalian, Tianjin and other places also have different degrees of delayed delivery, Chengdu except for individual projects delivery time to be determined, the rest of the projects have been delivered, and Dalian, Tianjin and other places of the delayed delivery of projects, most of the delivery time is not clear. The deferred delivery of the project may support the actual completion data in 2024.
From the perspective of investment returns, home furnishing listed companies stabilize cash dividends and provide stable dividend returns. The return on investment of listed companies to shareholders is worth paying attention to. The cash dividend ratio of leading household enterprises is generally 40%-50%, and high and stable cash dividends provide a stable dividend return (2%-5%).
From the perspective of development direction, there is still room for improvement in concentration, and category expansion & multiple channels are the development trend. The custom home furnishing industry has the characteristics of low frequency and high customer orders, complex SKUs and outstanding service attributes, so the overall industry concentration is low. Compared with the overseas market, European and American houses are mainly delivered in a standardized mode, and the ToB attribute is more prominent, so the leading enterprises are mostly born in the upstream building materials suppliers, and the revenue scale of the head enterprises is higher under the highlight of bulk attributes. With the diversification of channels, the whole assembly has high requirements for the flexible production capacity of home furnishing enterprises and tests the SKU management ability, and the winner needs to have a high-level coordination ability from the back-end production to the front-end sales. Therefore, home furnishing companies with strong business boundary expansion capabilities are expected to realize the full-link extension of home decoration, building materials, home furnishing, home appliances and after-sales integration, forming a multiplier effect of ecological complementarity, mutual promotion of traffic and mutual increase in performance.
From the perspective of historical competitiveness, the management and brand premium of the head company are highlighted. Through the gross sales difference and per capita income two financial indicators to depict the brand and management level of home furnishing listed companies, on the whole, the industry's leading enterprises Opai Home Furnishing two indicators are excellent, reflecting the company's high management efficiency and strong brand premium.
From the perspective of operating margin: the deviation of operating cash flow is increased, and the hematopoietic capacity of the enterprise is optimized. In 2022, the slowdown in the growth rate of downstream demand led to the weak hematopoietic capacity of the household, and the operating cash flow deviated significantly from the normal level, and this indicator improved significantly in 2023H1, which is a confirmation of the improvement of the company's operating quality.
(This article is for informational purposes only and does not represent any investment advice from us.) To use the information, please refer to the original report. ）
Selected report source: [Future Think Tank]. Future Think Tank - Official Website