1H22 results miss market consensus

Dong Yi Ri Sheng Home Decoration (DYRS) announced its 1H22 results: Revenue fell 45.58% YoY to Rmb964mn, attributable net losses totaled Rmb385mn (vs. Rmb128mn loss in 1H21), and recurring attributable net loss was Rmb385mn (vs. Rmb128mn loss in 1H21), missing market consensus as COVID-19 weakened offline sales and raw material prices rose. Revenue fell 23.35% YoY to Rmb375mn in 1Q22 and 54.06% YoY to Rmb589mn in 2Q22. Attributable net profit was -Rmb244mn in 1Q22 (vs. Rmb220mn loss in 1Q21) and -Rmb141mn in 2Q22 (turning negative YoY).

Trends to watch

All business segments suffer significant declines due to COVID-19. In 1H22, revenue from home decoration fell 47.33% YoY to Rmb824mn, with its gross margin (GM) down 4.72ppt YoY to 22.21%; high-end decoration revenue dropped 40.78% YoY to Rmb30mn; revenue from public building decoration projects declined 39.32% YoY to Rmb63mn. Due to COVID-19 resurgence in multiple regions in China in 1H22, the progress of logistics, order signing, and order turnover was constrained in southern China, Beijing, and other regions that account for a large proportion of the firm’s business. The firm’s revenue thus fell.

Profitability down; watch recovery. In 1H22, the firm’s gross margin (GM) fell 2.9ppt YoY to 25.96% due to rising raw material prices. In 1H22, its blended expense ratio grew 44.4ppt YoY to 80.11%. Selling, G&A and R&D, and financial expense ratio grew 31.3ppt, 12.3ppt, and 0.9ppt YoY to 51.91%, 26.74%, and 1.46%. Therefore, its net margin fell 32.7ppt YoY to -39.91%.

Digitalization strategy increased quality and efficiency; product upgrades and brand building progressing smoothly. Digital upgrade: The company has accelerated the implementation of its digitalization strategy. It matched the real home design software with the DIM+ system, successfully improving design efficiency and personalizing decoration solutions. It also used the Xingyao Software-as-a-Service system to achieve full-process digital delivery, with the on-time delivery rate of the digital integrated decoration business exceeding 95% and customer satisfaction exceeding 9.6 points out of 10. Product R&D: The firm invests much to improve product innovation. It independently designed more than 200 sets of lifestyle cases for digital integrated decoration and significantly optimized the performance of the Xingyao sales app, continuously improving its customer acquisition ability. The firm also pushed forward the vertical expansion of supply chain channels, selling 5,233 SKUs of 18 major items in the vertical supply chain of digital integration decoration products and 10,053 SKUs online in the regional supply chain, diversifying supporting products. Brand building: In February 2022, the firm was chosen by the Xinhua News Agency to participate in a national brand project for cutting-edge developments in consumer goods, and its image as a fashionable and trendy new Chinese home decoration brand is improving. We expect the firm's brand influence to increase.

Financials and valuation

As COVID-19 resurgence in 1H22 affected the firm’s businesses, we cut our 2022 attributable net profit forecast 65% to Rmb46mn and maintain our 2023 attributable net profit forecast of Rmb157mn. The stock is trading at 17x 2023e P/E. Maintain OUTPERFORM and TP of Rmb7 (19x 2023e P/E), offering 13% upside.

Risks

COVID-19 resurgence in some regions; rising raw material prices; unexpected regulations in the real estate industry.