1Q22 results miss market expectation

Dong Yi Ri Sheng Home Decoration (DYRS) announced its 1Q22 results: Revenue dropped 23.4% YoY to Rmb375mn, attributable net loss dropped 10.7% YoY to Rmb244mn, and recurring net loss dropped 12.7%YoY to Rmb247mn, missing market expectation. We attribute large losses in 1Q22 to COVID-19 resurgence in some areas, and we suggest watching for potential improvements in the firm's performance.

Trends to watch

COVID-19 resurgence weighed on the growth of new orders in 1Q22. By the end of 1Q22, contracted orders on hand (excluding completed projects) totaled Rmb1.79bn, including Rmb1.52bn from home decoration projects, Rmb95mn from high-end decoration projects, and Rmb181mn from public building decoration projects. In 1Q22, DYRS secured Rmb871mn of new orders, down 23.3% YoY. Specifically, its new orders in home decoration, high-end decoration, and public building decoration business segments were Rmb838mn, Rmb13mn, and Rmb20mn, down 13.3%, 86.5% and 73.1% YoY.

Gross margin edged downward; expense ratios increased significantly; watch improvement in future profitability. The firm's gross margin slid 0.7ppt YoY to 32.8% in 1Q22. Selling expense ratio rose 34.9ppt YoY to 84.4%, G&A and R&D expense ratio increased 9.4ppt YoY to 35.8%, and financial expense ratio rose 0.8ppt YoY to 1.7% in 1Q22. The firm's net margin dropped 20ppt YoY to -65.1% in 1Q22.

Business model and channels continue to upgrade; digital transformation empowers earnings growth. Channel construction: The firm is expanding the market by adding large offline retail stores and penetrating emerging online channels. We expect its efforts to help enhance the firm's market share and brand influence. Business model: The firm continues to optimize its leading business model in the integrated decoration segment. Supported by its digital transformation, large retail stores and supply chain integration, the firm is strengthening its integrated decoration business to meet diversified customer demand and to rapidly expand the whole decoration business. Digital transformation: The firm is leveraging digital and information technologies to link home decoration businesses and conduct digital operation and management. The firm provides high-quality and efficient project deliveries by strengthening the control and management of engineering, making intelligent production more efficient, and refining supply chain operations. As the digital reform proceeds, the firm will likely shorten the construction period, maximize efficiency of material consumption and reduce labor cost. We expect it to reduce cost and improve operating efficiency moving forward.

Financials and valuation

Given business adjustment and the impact of COVID-19 resurgence on construction schedule in some regions, we cut our 2022 and 2023 attributable net profit forecasts 20% and 11% to Rmb132mn and Rmb157mn. The stock is trading at 19x 2022e P/E and 16x 2023e P/E. We maintain an OUTPERFORM rating but lower our TP 7% to Rmb7, as we think the firm’s digital transformation will pay off moving forward. Our TP implies 22x 2022e and 19x 2023e P/E with 16% upside.

Risks

Regional COVID-19 resurgence; real estate regulations tighter than expected; intensifying competition.