Key takeaway

In 2Q26, revenue and net profit attributable to shareholders of the parent company increased 5.19% and 40.48% YoY, respectively. Revenue maintained steady growth. In 1H26, the company’s Zero-pressure Deep Sleep Pillow, a core best-selling product, continued to gain traction and drove growth in the quilt insert category. In 1H26, revenue from the US furniture business remained under pressure due to the overseas real estate environment, but its losses narrowed. By channel, in 1H 2 6, online channels delivered the fastest growth across all channels, while directly operated stores continued to improve quality and efficiency, and the pace of store closures in the franchise channel slowed. The product mix upgrade increased the share of high-margin products. Together with refined expense controls, this continue d to lift the company’s gross margin and net margin, significantly improving earnings quality.

Looking ahead to 2H26, the company will continue to deepen the iteration and upgrade of key products. New products will continue to be launched in 2H26. By channel, offline directly operated stores are expected to maintain their net store opening momentum, while the distributor channel will focus on optimizing stores in higher-tier cities, with profitability expected to recover further.

Event

The company released its 1H26 financial results: In 1H26, revenue was RMB2.302bn, up 5.5% YoY. Net profit attributable to shareholders of the parent company was RMB249mn, up 34.4% YoY. Net profit attributable to shareholders of the parent company after deducting non-recurring items was RMB208mn, up 34.9% YoY. Basic EPS was RMB0.30, up 34.0% YoY. Weighted ROE was 5.77%, up 1.38pcts YoY. The company proposed an interim dividend of RMB2.8 per 10 shares, including tax, representing a payout ratio of 94.0%.

Quick Take

Revenue grew steadily in 2Q26, while profitability continued to improve. Revenue in 2Q26 was RMB1.144bn, up 5.19% YoY. Online e-commerce growth was estimated to have remained faster than offline store growth. Net profit attributable to shareholders of the parent company in 2Q26 was RMB102mn, up 40.48% YoY. Net profit attributable to shareholders of the parent company after deducting non-recurring items was RMB71mn, up 47.09% YoY. The strong earnings growth was mainly driven by a higher gross margin from the product mix upgrade and by cost reductions and efficiency improvements in expense management. The company’s gross margin in 2Q26 was 50.38%, up 0.69pct YoY. Selling expense, adm inistrative expense, R&D expense and financing expense ratios were 31.56%, 3.25%, 3.84% and 0.43%, respectively, changing by +0.70pct, -3.80pcts, +0.51pct and +1.32pcts YoY. The sharp decrease in administrative expense was mainly due to a high base in the same period last year, when the company incurred litigation expenses. Net margin in 2Q26 was 8.90%, up 2.24pcts YoY.

Best-selling products continued to drive growth in home textile subcategories in 1H26, while online channels maintained strong momentum and improvements at offline stores delivered notable results. In 1H26, the company generated revenue of RMB2.302bn, up 5.5% YoY, of which:

1) By product category: The core blockbuster product, the Zero-pressure deep sleep pillow, performed strongly, while the profitability of the overseas furniture business improved. In 1H26, revenue from comforter inserts reached RMB856mn, up 21.97% YoY; revenue from pillow inserts fell 10.6% YoY, while revenue from bedding sets grew steadily by 7.8%. Blockbuster products continued to drive overall category growth. The gross margin of the core home textile business was 53.0%, up 1.5 pcts YoY. In 1H26, the US furniture business generated revenue of RMB356mn, down 9.25% YoY, and recorded a loss of RMB21.72mn, compared with a loss of RMB28.7534mn in the same period last year. Operating pressure on the US business may persist.

2) By channel: Online channels maintained rapid growth, directly operated channels improved in both scale and efficiency, and adjustments to franchise channels were nearly complete. In 1H26, online revenue reached RMB840mn, up 13.82% YoY. Leveraging scenario-based content marketing on Douyin, the company built an omnichannel traffic conversion pathway around its core blockbuster products, and the gross margin of online channels reached 57.6%, up 2.9 pcts YoY; revenue from directly operated channels reached RMB209mn, up 9.78% YoY. As of the end of 1H26, the company had 393 directly operated stores, a net increase of 18. Average monthly sales per directly operated store were RMB80,000 in 1H26, down 3.1% YoY, while same-store retail sales at directly operated stores rose 8.1% YoY. The gross margin of the directly operated business was 69.08% in 1H26, up 1.3 pcts YoY; revenue from franchise channels reached RMB647mn, up 7.0% YoY. As of the end of 1H26, the company had 2,030 franchised stores, a net decrease of six. Downstream partners' willingness to place orders gradually improved, and the gross margin of the franchise business was 47.04% in 1H26, up 1.95 pcts YoY.

More targeted e-commerce advertising and supply chain cost reductions continued to enhance the company's profitability. In 1H26, the company's gross margin was 49.98%, up 2.15 pcts YoY, mainly driven by a higher share of high-margin blockbuster products and an optimized online channel mix. In 1H26, the company's selling expense, administrative expense, R&D expense, and financing expense ratios were 27.71% (+1.47 pcts YoY), 5.75% (-2.13 pcts YoY), 3.00% (+0.22 pct YoY), and 0.33% (+0.71 pct YoY), respectively. The increase in the selling expense ratio was mainly due to higher advertising spending on blockbuster products. The decline in the administrative expense ratio was mainly attributable to the high base of litigation expenses in the same period last year, as well as cost reductions and efficiency gains following the commencement of operations at the company's smart industrial park. The net margin was 10.83% in 1H26, up 2.33 pcts YoY.

Outlook: The company will continue to deepen its blockbuster product iteration strategy and upgrade the functionality of its existing best-selling pillows and fitted sheets in 2H26. On the product front, the company will continue to expand the SKUs in its premium series in 2H26. Best-selling products such as pillows and fitted sheets will receive functional upgrades in the second half of the year, and the company will continue to optimize its product mix. For online channels, the company continues to deepen content operations across the Douyin and Xiaohongshu ecosystems, optimize its advertising mix, and improve traffic conversion efficiency; for offline directly operated channels, the company plans to achieve net store openings in the second half of the year while continuing to improve the operating efficiency of existing stores; for distribution channels, the company will focus on optimizing stores’ profit structure.

Investment recommendation: Given the improvement in gross margin driven by the company’s hero product strategy and its effective expense control, we raise our earnings forecasts. We expect revenue to reach RMB5.24bn, RMB5.63bn, and RMB6.02bn in 2026-2028, up 8.3%, 7.4%, and 7.1% YoY, respectively. Net profit attributable to shareholders of the parent company is expected to reach RMB630mn, RMB710mn, and RMB780mn, respectively, versus previous forecasts of RMB600mn, RMB670mn, and RMB760mn, up 21.3%, 12.1%, and 10.5% YoY. The corresponding P/E multiples are 15.3x, 13.7x, and 12.4x. We maintain “Buy” rating.

Risks:

1) Risk of macroeconomic fluctuations: The company operates in China’s mass consumer market and the premium home furnishings and home textile market. Market demand is highly affected by macroeconomic trends and residents’ disposable income. If the macroeconomic recovery falls short of expectations and consumer confidence remains weak, the company’s core domestic business will face a sustained adverse impact. Meanwhile, the company’s furniture business is primarily based in North America and faces uncertainties arising from the restructuring of the global trade landscape, complex geopolitical conditions, and changes in overseas real estate cycles. These factors may also adversely affect the company’s operating results.

2) Raw material price volatility and rising costs of production factors: The raw materials required for the company’s production, such as cotton, down, rubber, synthe tic fibers, and silk, are affected by natural conditions, trade policies, market price fluctuations, and other factors. This may result in supply shortages or cost volatility. If the costs of production factors such as labor, energy, and logistics continue to rise across the industry, increased cost pressure may also affect the company’s normal production and operating activities.

3) Risks from intensifying market competition and technological change: Market concentration in the home textile industry remains low. Competition among leading brands continues to intensify, while companies from other sectors are accelerating their expansion into the home textile market, making competition increasingly fierce. Meanwhile, artificial intelligence is being adopted rapidly, accelerating technological upgrades and business model innovation in the home textile industry. If the company’s innovation capabilities fail to keep pace with industry development, it may face a declining market share, compressed profit margins, and further market share losses to competitors.