The Zhitong Finance App learned that Zhongtai Securities released a research report stating that maintaining Sophia's (002572.SZ) “buy” rating, the company expects net profit to be 15.05, 16.58, and 1,817 billion yuan from 2024 to 2026, corresponding to PE 10, 9, and 8 times. The company's overall strategy continues to deepen, driving a significant increase in customer unit prices; after optimizing the brand matrix, the positioning is clear, providing impetus for subsequent growth, and the industry is still resilient under pressure.

The main views of Zhongtai Securities are as follows:

Incident: The company's 23rd annual report is still resilient under pressure from the industry. In '23, we achieved operating income of 11.666 billion yuan, +3.95% year on year; realized net profit of 1,261 billion yuan, +18.51% year on year; net profit after deduction of 1,135 billion yuan, +21.06% year on year. On a quarterly basis, Q1/Q2/Q3/Q4 revenue growth rates were -9.7%/+5.63%/+9.64%/+5.37%; net profit growth rates to mother were -8.86%/+32.93%/+15.63%/+18.4%, respectively; net profit of 0.9/3.79/4.38/ 229 million yuan, year-on-year, -15.58%/+44.45%/+14.35%/+22.82%, respectively.

Looking at each brand, the main brand growth was mainly driven by customer unit price, and the cost-effective growth of the brand Milana was beautiful. 1) Sophia Brand: Customer unit prices continue to grow. Revenue for 23 years was 10.555 billion yuan, +10.96% year on year; the unit price for factory end customers was 19619 yuan, +6.30% year over year. By the end of '23, there were 1,812 dealers (1,781 at the end of '22) and 2,727 specialty stores (2,829 at the end of '22). 2) Milana brand: The opening of the store is in line with expectations, and revenue is gradually increasing. Revenue in '23 was 472 million yuan, +47.24% year over year; average customer unit price was 13,934 yuan, +6.57% year over year. By the end of '23, the number of dealers was 514 (465 at the end of '22); the number of stores was 514 (125 at the end of '22). 3) Simi brand: Changes are progressing smoothly. As of the end of '23, there were 222 dealers and 249 specialty stores, including 212 wardrobe sample stores. The overlap rate between Simi brand dealers and Sophia brand dealers was further reduced in '23, and terminal stores are gradually being transformed into whole stores. The overall strategy will increase customer unit prices. 4) Huahe brand: revenue of 163 million yuan in 23 years. As of the end of '23, there were 276 dealers (328 at the end of '22) and 277 specialty stores (319 at the end of '22).

Looking at retail channels by channel, retail channels (including packaging) are growing steadily, and bulk channels are being dragged down. The revenue of dealer channels/direct channels/bulk channels for 23 years was 96.27/ 3.15/1,451 billion yuan respectively, +4.36%/+13.58%/-4.86% year-on-year respectively. By product, the wardrobe is quite resilient, and the number of wooden doors is gradually being released. The revenue of wardrobes and accessories/cabinets and accessories/wooden doors in 23 years was $94.11/ 12.44/ 589 million yuan, respectively, +2.54%/-2.23%/+35.73% year-on-year.

Profit margins continued to improve, and credit impairment losses caused a certain drag. In '23, the company's gross margin was +3.16pp to 36.15%; net margin was +1.76pp to 11.34%; the period expense ratio was -0.24pp to 20.26%; among them, sales expenses ratio -0.28pp to 9.66%; management expense ratio (including R&D expense ratio 3.54%) was +0.19pp to 10.14% year over year; financial expenses ratio -0.16pp to 0.46% yoy. Factors such as cost reduction and efficiency, retail channels, and an increase in the share of wardrobe products led to an increase in gross margin, and the cost control effect during the period was good. Credit impairment losses caused a certain drag on the profit side. Of these, credit impairment losses amounted to 186 million yuan, an increase of 150 million yuan over 22. If abnormal credit impairment losses were excluded, the net profit margin to mother reached 12%. Single Q4 gross margin +4.07pp to 37.42% year over year; net margin +1.82pp to 9.63% year over year; period expense ratio -1.72pp to 19.59% year over year.

Cash flow performance was excellent, and operational efficiency improved significantly. In terms of cash flow, operating cash flow of 2,654 billion yuan was achieved in '23, +94.69%; the ratio of operating cash flow/net income from operating activities was 185.32%; and cash flow/operating income from sales was +8.7pp to 116.49% year over year. In terms of operational efficiency, inventory turnover days were 31.15 days, down 3.67 days; accounts receivable turnover days were 35.5 days, down 1.93 days year on year; and accounts payable turnover days was 72.79 days, up 4.38 days year on year.

Investment advice: The company's overall strategy continues to be deepened, driving a significant increase in customer unit prices; after optimizing the brand matrix, the positioning is clear, providing impetus for subsequent growth, and the industry is still resilient under pressure. We expect the company's net profit from 2024-2026 to be 1,505, 16.58, and 1,817 billion yuan (the value before 24-25 was 15.65 billion yuan and 1,829 billion yuan, adjusted according to the 23-year results), and the corresponding PE is 10, 9, and 8 times, maintaining a “buy” rating.

Risk warning: risk that downstream demand falls short of expectations; market competition increases risk; risk of large fluctuations in raw material prices