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Is new always better? Not necessarily! Ultimately, it all comes down to shareholder returns.

Author | Xianyan

Editor | Xiaobai

In December 2023, Mercury Home Textiles (the "Company", 603365.SH) announced a plan to issue convertible corporate bonds to unspecified objects. The issuance scale will not exceed RMB 1.015 billion. After deducting the issuance fee, the funds will be mainly used to build the Nantong Industrial Base, the intelligent warehousing base, and replenish capital.

(Source: Shanghai Mercury Home Textile Co., Ltd.'s plan to issue convertible corporate bonds to unspecified objects)

Those who are familiar with convertible bonds probably understand that companies issue convertible bonds mainly for the purpose of converting them into shares. Otherwise, the tiny interest rates would not attract investors at all.

In other words, convertible bonds look gentle, but in fact they will eventually dilute the interests of small and medium shareholders. So this is not news that will cheer small and medium investors.

When Fengyunjun saw the announcement, he was even more confused: What kind of family is this? They are so generous and they ask for 1 billion right away?

In Fengyunjun's impression, the home textile industry can be said to be a well-known top student in the capital market. "Making a fortune in silence" can be translated into financial language as low debt + light assets + good cash flow + strong dividends...

This is called good business. Logically, it shouldn't be a big problem to support oneself and return the shareholders, so why doesn't this guy with thick eyebrows and big eyes play by the rules?

Reviewing the home textile industry

Combining the Market Capitalization Fengyun App - Wogu F10 and the company's prospectus information, Fengyunjun selected Luolai Lifestyle (002293.SZ) and Fuanna (002327.SZ) as the company's comparable companies.

The products of the three companies are mainly bedding sets, quilt cores, and pillow cores, especially the former two, which account for a relatively high proportion. The only exception is that Luolai Life has nearly 1 billion yuan, accounting for 20% of its revenue, from furniture, which corresponds to the high-end furniture brand Lexington acquired in the United States in 2017.

Among the three companies, the company has the best growth, increasing from 2.7 billion in 2018 to 4.2 billion in 2023, with a CAGR of 9%. Although it is still in single digits, it is already a good performance in the industry. Luolai Life and Fuanna can be said to have almost no growth.

What better illustrates the company's operating characteristics is that the e-commerce business achieved an average annual compound growth rate of 19% during the same period, which was the core driving force for revenue growth.

If we put aside Luolai Life's $1 billion in revenue in the United States, the company's revenue in the domestic market in 2023 will be on par with Luolai Life.

(Source: Market Capitalization App)

Verify from another channel, although the reliability will be discounted.

According to statistics from Whale Consultants, among the top ten home textile industries in 2023, the company ranked second with a market share of 3.62%, second only to the first-place MUJI (3.96%). Luolai brand ranked fifth (2.79%) and Fuanna ranked eighth (1.42%).

(Source: Whale Consultant - Brand Ranking Analysis)

We can roughly draw the following conclusion: the concentration of this industry is very low, and the combined market share of the top 10 is less than 24%. This is fatal for traditional mature industries (limited to the perspective of investors). The leading players are far from being separated, and no one is willing to give in to the other, so the fight will continue.

What's worse is that there is almost no growth in the domestic market. According to data from China Home Textiles and Forward Industry Research Institute, the market size of my country's home textile industry has grown by double digits in recent years, except for 2019, and the growth in other years is almost negligible.

(Source: China Home Textiles, Qianzhan Industry Research Institute)

So, the core question is: Why has the company been able to surpass the industry average and achieve faster growth in the past few years?

The answer is channel dividend.

A role model for online players

Shuixing Home Textiles was founded in 1987 and claims to be an important founder of China's home textile industry. It currently leads the industry in comprehensive strength. The company was listed on the Shanghai Stock Exchange in 2017, later than the other two (in 2009).

The company builds a brand matrix around Mercury to meet the diverse and personalized needs of consumers.

(Source: Company 2023 ESG Report)

In 2023, Luolai Life's online channel revenue was 1.6 billion, accounting for 30% of the total revenue; Fuanna's e-commerce revenue was 1.2 billion, accounting for 40%; and Mercury Home Textiles' e-commerce revenue was 2.4 billion, accounting for more than half of the revenue, reaching 57%.

It can be said that Mercury Home Textiles has the most prominent Internet genes.

In fact, if we trace back to 2014, the company's e-commerce channel sales accounted for 21% at that time, and then continued to grow year by year.

(Source: Company prospectus)

By comparison:

It was not until the 2021 annual report that Luolai Life began to openly display the sales amount (1.6 billion) and proportion (28%) of online channels; in 2014, Fuanna called channels other than "traditional offline physical channels" "new channels", which naturally included but not entirely e-commerce channels, accounting for about 19% of revenue that year. In 2018, it gave a clear statement for the first time that e-commerce channel sales revenue accounted for 29%, and then increased year by year.

It can also be said that Luolai Life is more inclined towards traditional offline channels, Fuanna is in the middle, and the company is more inclined towards online channels.

The company proudly admits that it is one of the earliest home textile companies in the industry to focus on e-commerce channels, and has quickly accumulated first-mover advantages. After years of efficient operations, its classic main brand "Mercury Home Textiles" has long occupied a leading position in the sales rankings on major mainstream e-commerce platforms.

But the bad news is that there is not much channel dividend left.

Compared with the agency model mainly adopted by these offline sales, the online model has a strong negotiating position due to the concentration of channels, which basically means that if merchants want to expand online, they have to leave a bribe - not only the platform fee, but also various paid promotion services.

They are all basic needs and they all cost money.

Therefore, the online bonus period can be declared basically over, and will eventually reach a balance with offline sales costs.

The most intuitive manifestation is that the company does not gain any advantage among the sales expense ratios of various companies. It basically maintains the same level as Luolai Life, or even slightly higher.

(Source: Market Capitalization App)

All three companies are obviously sales-driven and basically do not need R&D. In terms of net profit attributable to shareholders after deducting non-recurring items, which is used to examine the final operating results, the company has the lowest net profit.

(Source: Market Capitalization App)

This shows that online sales may just “win face” but “lose substance”: although various activities seem to be booming and lively, it is difficult to make money.

So what causes the profit margin gap?

The most important thing is to return to the gross profit margin level. The company can be said to have lost at the starting line. Taking 2023 as an example, it is 7 percentage points lower than Luolai Life and 16 percentage points lower than Fuanna, and this has been the case in the past few years.

(Source: Market Capitalization App)

Combined with the company's revenue growth rate, Fengyunjun speculates that it is still related to its reliance on online platforms. The company's online direct sales include two types:

1. The company self-operates, that is, it builds its own online store on a well-known e-commerce platform and sells goods directly to end consumers. The main platforms are Tmall and JD.com; 2. "E-commerce platform self-operation/agent sales" refers to the e-commerce platform purchasing and settling with the company or the e-commerce platform selling the company's products on behalf of the company and then settling with the company. The e-commerce platform is the company's direct customer and settles with the company. The main customers are JD.com and Vipshop.

In terms of self-operation, the company will inevitably hold promotional activities from time to time to seize the market. After all, online price reduction activities have a direct impact on sales. Online shopping has even reshaped consumers' shopping habits: no activities, no purchases, thanks to the temptation of low prices is written into human genes. Of course, the company will reduce revenue in accounting treatment, resulting in a decline in gross profit margin.

If the platform operates the products itself or sells them on behalf of others, the company will not be able to gain much advantage through bargaining. Price cuts will directly lead to low gross profit margins. After all, the platform's concentration is much higher than that of the home textile industry. The platform will even use outsourced production to launch its own brands, competing with these customers with weak bargaining power.

In short, the company's current financial indicators are caused by its business model. The two are one for the surface and the other for the inside, and they are consistent.

Focus on light asset model

Luolai Life's annual report will disclose capacity utilization data:

(Source: Luolai Life 2023 Annual Report)

Fuanna is also similar:

(Source: Fuanna 2023 Annual Report)

However, the company did not disclose it in its annual report, which means it is not important.The company said that it mainly adopts three production methods, namely independent production, commissioned processing, and customized production (OEM), the latter two of which are collectively referred to as outsourcing production. Among them:

The company mainly produces sets, quilt cores and pillow cores by itself; the commissioned processing mainly targets the dyeing and finishing of grey cloth, embroidery or quilting of sets, sewing of sets and other processes; the customized production (OEM) mainly includes down quilts, some silk quilts, some pillow cores, bamboo mats, bed pads, blankets and mosquito nets and other products.

In fact, when the company went public in 2017, it disclosed that the only investment project related to production capacity was the addition of 700,000 quilt cores per year. The company has also maintained a relatively high proportion of outsourcing production.

(Source: Company prospectus)

This can also be cross-verified from another financial indicator: as of the end of 2023, the proportion of fixed assets and projects under construction in total assets of Luolai Life was 17%, Fuanna was 24%, and the company was only 10%.

The company's business philosophy is to operate with light assets.

With the same asset scale, the company has a stronger ability to generate revenue, so its total asset turnover rate is also significantly higher than that of its two peers.

(Source: Market Capitalization App)

Shareholder returns are good, but still pale in comparison

In general, the three companies have their own trade-offs in operations, but the final return on net assets is roughly the same, and none of them is much better than the other.

(Source: Market Capitalization App)

An ROE of slightly over 10% can only be considered not bad, considering that there are so many competitors who are not idle either, and the fighting between them will continue for a long time.

In terms of each company's willingness to pay dividends, all three companies are good in the long run. Although our company is considered the weak link among them and pales in comparison with the other two, fortunately it has caught up in the past two years.

(Source: Market Capitalization App)

But if we look at the amount, the gap between the company and the other two is very obvious. In the past seven years, the company has distributed a total of 1.18 billion to shareholders, Luolai Life 3.32 billion, and Fuanna 3.02 billion.

(Source: Market Capitalization App)

A simple calculation shows that Luolai Life's dividend-to-funding ratio since its listing is 318%, that is, the cumulative dividend amount is 3.18 times the amount of funds raised. Fuanna's is 444%, while the company's is only 111%. We still have to learn from the two predecessors and hurry up to return to shareholders.

After reading these three companies, I have to sigh: Your uncle is still your uncle! Business models can be innovative, but new does not mean good.

Whether it is good or not depends on how much value it can create and return to shareholders. Of course, when management wants to make big plans, does it habitually ask for money in the secondary market?

Disclaimer:This report (article) is an independent third-party research based on the public company attributes of listed companies and the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.). Market Capitalization strives to be objective and fair in the content and views contained in the report (article), but does not guarantee its accuracy, completeness, timeliness, etc. The information or opinions expressed in this report (article) do not constitute any investment advice, and Market Capitalization shall not bear any responsibility for any actions taken as a result of using this report.

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