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Consumers' purchasing drivers have gradually shifted from the need to decorate their new homes to the pursuit of quality of life.

Author | Muppets

Editor | Xiaobai

Recently, a saying called "45 degrees of life" has become popular, describing the state of "can't lie flat, but can't roll up". However, when it comes to "lying flat", Fengyunjun has something to say: lying flat is actually an extremely comfortable experience!

However, what Fengyunjun is referring to is not laziness, but finding a moment of tranquility in the busy pace of life. When you go shopping at IKEA on weekends, you will find that both men and women like to stay in the sofa and bed area, immerse themselves in the world of mobile phones, and enjoy a day of leisure.

According to the National Upgrade White Paper II, nearly 70% of young people now choose to play with their mobile phones on the sofa as their first leisure activity after get off work. Compared with traditional sofas, functional sofas with functions such as adjustable steering, rocking and massage are more attractive to young people.

Today, Fengyunjun will talk to you about sofas.

Strategic adjustments after the trade war, focusing on developing the Chinese market

Man Wah Holdings (01999.HK) is a Hong Kong-listed company that occupies a leading position in the functional sofa industry.

Man Wah Holdings was founded in 1992 and is headquartered in Hong Kong, China. It has several branches in core economic regions around the world, including China, the United States, and the United Kingdom.

The company's products are mainly functional sofas, supplemented by mattresses, panel furniture and furniture accessories. The company owns 11 series of three well-known brands, namely Chivas, First Class and Nicoletti. By the end of 2023, the company's market share in China's functional sofa market will reach 53%.

As of March 31, 2024, founder Huang Minli is the actual controller of the company. He holds a total of 62.4% of the company's shares through direct and indirect shareholding (mainly through Minwah Investment Co., Ltd.).

In the fiscal year 2024 (the fiscal year ending date is March 31 of the calendar year), the company's revenue was HK$18.41 billion (a year-on-year increase of 6.1%) and its net profit attributable to shareholders was HK$2.3 billion (a year-on-year increase of 20.2%).

Note: Unless otherwise specified, all amounts in this article are in Hong Kong dollars.

(Source: Company annual report, Chart: Market Capitalization APP)

The revenue growth in fiscal year 2024 was mainly due to the growth of the Chinese market, which contributed more than 65% of the revenue. The penetration rate of the Chinese functional sofa market increased in this fiscal year, from 7.2% in the same period last year to 9.7% this year.

In addition, the increase in net profit attributable to shareholders of the parent company in this fiscal year was mainly attributed to two aspects: one is the optimization of period expenses (mainly the company's slight reduction in employee salaries), and the other is the cost of raw materials being at a historical low.

Looking back, the company has maintained revenue growth almost every year.

Fiscal year 2023 is the only year in which the company's revenue has declined since its listing in Hong Kong. The main reason is that in this fiscal year (early April 2022 to the end of March 2023), the epidemic had a significant impact on the Chinese and US markets, coupled with high inventory and commodity price inflation in the US consumer goods market, which suppressed the demand for sofas.

Over the past decade, China and the United States have been the two most important markets for Man Wah Holdings. Before the escalation of Sino-US trade frictions (before fiscal year 2019), the US market contributed about half of the company's revenue and was the company's largest market.

However, after the trade war, despite the company's active response, including establishing a production base in Vietnam to circumvent tariffs and strengthening communication with American customers, it can only barely stabilize its revenue scale and market share. Revenue in the US market has hardly grown during the 2019-2024 fiscal year.

A-share listed company Jiangxin Home Furnishing (301061.SZ) also focuses on functional sofas and smart mattresses, and is highly dependent on the US market (accounting for about 80% of its revenue). After the trade war, the company's business development in the United States has also encountered obvious obstacles.

(Source: Market Capitalization APP)

However, due to different customer types and business philosophies, the two companies have adopted completely different response strategies. The downstream customers of Jiangxin Home Furnishing are mainly B-end customers such as brands and retailers, and sales are mainly carried out through participating in international exhibitions. Therefore, Jiangxin Home Furnishing's sales expenses are lower than its peers.

For example, the sales expense ratio of peers is generally around 10%-18%, while that of Jiangxin Home Furnishing was about 7.5% before the trade war. Now, after encountering the impact of the trade war, it has decided to play it safe, with a sales expense ratio not exceeding 3.5%. The idle money will be used to purchase financial products, waiting for the next favorable industry cycle to appear.

In contrast, Man Wah Holdings is determined to focus on developing the Chinese market after the trade war and has increased its investment in sales expenses. The company's average sales expense ratio was around 16% during the 2014-2020 fiscal year, and it began to rapidly increase to more than 18% in the 2021 fiscal year and will continue until the 2024 fiscal year.

The result of this approach is that China's revenue has increased from 6.95 billion in fiscal 2020 to 12.26 billion in fiscal 2024, with a CAGR of 15.2%. In fiscal 2024, China has become the company's largest market.

(Source: Company annual report, Chart: Market Capitalization APP)

ROE has declined, but is still correlated with the prosperity of the real estate industry

Since fiscal year 2020, the company has started to focus on the Chinese market, continuously improving the layout of the domestic upstream industrial chain and vertically integrated production, and establishing production bases in many places across the country to reduce costs. As a result, the company's gross profit margin has continued to increase slightly.

With the scale advantages brought by its leading position in the functional sofa field and strong upstream bargaining power in the industry, Minwah Holdings is able to bypass middlemen and negotiate directly with source manufacturers to obtain lower purchasing prices than its peers.

In addition, due to its large production scale, Minwah Holdings has more advantages in purchasing production equipment and can choose equipment that is more advanced and expensive than the industry average.

For example, the company's sewing equipment can save 5% of leather on average compared to its peers. In the case of large production volumes, the cost savings brought by these equipment are enough to offset their high purchase costs.

Generally speaking, the material cost of sofa products accounts for 75%-80% of the total cost, mainly including leather, sponge and wood. Among them, leather is one of the main purchased raw materials, accounting for about 40% of the total cost. Therefore, investment in equipment can effectively reduce the production cost of sofa products, thereby increasing gross profit margin.

Therefore, Minwah Holdings' gross profit margin has remained above 34%, reaching 39% in fiscal 2024, ranking first in the industry.

To verify this point, this article selected four A-share listed companies as comparable companies: Gu Jiajia Furniture (603816.SH), Jiangxin Home Furnishing, Mlily (603313.SH), and Henglin Holdings (603661.SH).

Fengyunjun's selection criteria for comparable companies: First, the company's main business is seats/sofas/soft furniture, and its revenue accounts for more than half; second, combined with the F10 comparison function of the Market Capitalization Fengyun APP, the industry purity and revenue scale similarity are used as indicators to screen out the four most matching A-share listed companies. In the Hong Kong stock furniture sector, Minwah Holdings' revenue scale far exceeds that of other companies. For example, its revenue scale is 22 times and 300 times that of the second-ranked Royal Home Furnishing (01198.HK) and the third-ranked Qijia Holdings (08395.HK), respectively. Due to the large difference in scale, this article did not select Hong Kong stocks for horizontal comparison.

It can be seen that the company's gross profit margin in fiscal year 2024 exceeded 38.4% of Menglily, the best performing of the four comparable companies (roughly corresponding to 2023 of A-share listed companies, the most recent full fiscal year).

(Source: Market Capitalization APP-F10 comparison function)

However, as the company increased its investment in sales and channel expansion, sales expenses increased significantly, causing the company's adjusted operating profit margin and net profit margin to decline after fiscal 2020.

Thanks to the continued increase in gross profit margin and effective control of period expenses after fiscal 2022, Minwah Holdings' adjusted operating profit margin and net profit margin rebounded to 18.3% and 12.5% ​​in fiscal 2024, returning to the level of fiscal 2020.

(Source: Company annual report, Chart: Market Capitalization APP)

The downturn in the real estate industry in recent years has led to a certain degree of profitability decline in the furniture industry, sales decline and inventory backlog. The four comparable A-share companies (Gujia Home Furnishing, Jiangxin Home Furnishing, Menglily, and Henglin) have almost all seen a decline in ROE. For example, Menglily's ROE fell from 13.3% in 2018 to 2.9% in 2023.

The exception is Gujia Furniture, which is also developing markets such as Northeast Africa and Latin America during this period, so the impact is relatively small. The ROE in 2023 is 19.3%, which is basically the same as 18.9% in 2018.

(Source: Market Capitalization APP-F10 comparison function)

Man Wah Holdings was not immune to the industry downturn. From the Sino-US trade friction in fiscal 2017 to the subsequent decline in the real estate industry and the impact of the epidemic, the company also faced the dilemma of inventory backlog and declining sales, and its ROE performance was also affected.

Man Wah Holdings' ROE fell from 34.8% in fiscal 2017 to 14.7% in fiscal 2023. In fiscal 2024, the company's ROE rebounded to 18.7%, benefiting from sales growth in the Chinese market and lower raw material prices.

(Source: Company annual report, Chart: Market Capitalization APP)

In addition, the company's deleveraging strategy starting from fiscal 2020 also contributed to the decline in ROE to a certain extent.

In fiscal 2019, the company increased its loans to meet its funding needs by building new production bases in many parts of China in order to step up its efforts to develop the Chinese market. Now that the business expansion in the Chinese market has paid off, the company has begun to gradually adjust its leverage ratio to the level before fiscal 2017 by repaying debts in advance.

As of the end of fiscal year 2024, the company's interest-bearing debt ratio and debt-to-asset ratio were 20.8% and 34%, respectively.

(Source: Company annual report, Chart: Market Capitalization APP)

Gradually get rid of the constraints of cycles through product rejuvenation

As a company in the furniture industry, Minwah Holdings' business prospects are somewhat related to the prosperity of the real estate industry.

Sofas and supporting products are the main products of Man Wah Holdings, accounting for more than 90% of revenue before fiscal year 2015. By 2024, this proportion has dropped to 68.8%, mainly because the company began to expand into the bedding market in fiscal year 2016. Now in fiscal year 2023-2024, the bedding product line contributes about 16% of the company's revenue.

However, bedding is still an area that is highly correlated with the prosperity of the real estate industry.

In addition, Man Wah Holdings has expanded its overseas market through acquisitions and strategic alliances, forming an overseas furniture business segment centered on the Home Group, which sells to well-known European furniture companies such as IKEA, Steinhoff and XXXLutz.

However, the overseas expansion of Chinese furniture companies is not smooth sailing. For example, Jiangxin Home Furnishing, which focuses on overseas furniture business, has already decided to take a lay-by and regard the purchase of financial products as one of its important sources of profit, while Gujia Home Furnishing has also achieved a year-on-year growth of no more than 8% in overseas business revenue for two consecutive years (2022 and 2023).

The CAGR of Minwah Holdings' overseas business in the past 10 years (fiscal year 2015-2024) was only 3.6%.

Given that this business line has contributed less than 9% to the company's revenue in the past 10 years, we will not conduct further analysis.

(Source: Company annual report, Chart: Market Capitalization APP)

However, compared with other furniture companies, Minwah Holdings has its own unique features: its product characteristics make its correlation with the domestic real estate industry cycle continue to decline.

Minwah Holdings' consumer group is showing a trend of getting younger, with consumers under the age of 35 accounting for more than three-quarters, of which customers aged 25-30 account for about 40%.

In other words, people born in the 1980s and 1990s have become the main consumer group. In addition to cost-effectiveness, they also pay attention to the unique design and fashionable appearance of products.

Minwah Holdings' current main product is functional sofas, and its three major brands (Chivas, First Class, and Nicoletti) are all positioned in this niche segment.

Although the company has not disclosed the proportion of functional sofas in total sofa sales, in the annual reports of the past six years, the company has repeatedly emphasized that functional sofas are the main driving force for sales growth in the Chinese market.

Currently, functional sofas are still in a period of growth in China.

By the end of 2023, the market penetration rate of functional sofas in China will be only 9.7%, still lower than the nearly 50% level in the European and American markets. According to data from Zhiyan Consulting, during the period 2014-2020, the scale of the domestic functional sofa market grew from RMB 4.25 billion to RMB 8.78 billion, with a CAGR of 12.8%.

In order to cater to the young consumer groups and taking into account their relative sensitivity to prices, the company has set the price of functional sofas on some product lines at a level similar to that of traditional sofas, allowing consumers to enjoy functions such as one-touch electric reclining and smart USB charging without spending extra money.

Taking a three-seater leather sofa as an example, the market reference price of some electric functional sofas in Chivas First Class is around 7,299 yuan, while the average price of non-functional leather sofas of the same grade is about 7,185 yuan. In other words, consumers can get more functions and experiences than traditional sofas without spending extra money.

At the same time, the company has also launched special items such as "Cat Single Chair" for young people.

According to user data from Man Wah Holdings, as of the end of fiscal year 2024, the proportion of consumers who purchased the company's sofa products (mainly functional sofas) due to the purchase of new or second-hand houses has dropped to 30%. Consumers' purchasing drivers have gradually shifted from the need to furnish new homes to the pursuit of quality of life.

With the growth of its business in China, Man Wah Holdings' net operating cash flow during the 2020-2024 fiscal year has increased significantly compared with the previous period. Although the company has built new production bases in many places in China since fiscal 2019, resulting in increased capital expenditure, overall, free cash flow has still increased.

In fiscal year 2024, the company's net operating cash flow and free cash flow were 2.55 billion and 990 million, respectively, and the cumulative free cash flow since its listing was 7.99 billion.

(Source: Company annual report, Chart: Market Capitalization APP)

In contrast, the free cash flow of A-share peers during the same period (2019-2023) was mostly negative, only slightly increased, or declined. For example, Gu Jiajia Furniture's free cash flow fell from RMB 1.36 billion in 2019 to RMB 220 million in 2023.

(Source: Market Capitalization APP-F10 comparison function)

Overall, Man Wah Holdings' dividend strategy of distributing half of the company's net profit to shareholders has performed well.

The main advantage of Minwah Holdings lies in the scale advantage brought by its leading position in the industry, which enables it to maintain a higher gross profit margin and better profitability when the prices of its products are similar to those of its competitors. Even in an industry downturn, it is more likely to generate net profit, thereby guaranteeing dividends.

The company's average dividend rate since its listing is 52.2%, and the dividend rate in fiscal 2024 is 50.7%.

(Source: Company annual report, Chart: Market Capitalization APP)

In addition, the company has distributed dividends of 700 million to 1.2 billion yuan each year since fiscal 2018 (dividends and repurchase amounts were lowered in fiscal 2019 due to increased investment in the Chinese market). At the same time, the company also repurchases shares worth 50 million to 240 million yuan each year.

The share repurchase amount for fiscal year 2024 is 150 million.

(Source: Company annual report, Chart: Market Capitalization APP)

At present, the PB of Man Wah Holdings is at a historical low since its listing, which is mainly affected by the low valuation of the overall Hong Kong stock market and the historical low valuation of the furniture industry in Hong Kong stocks. The company's average PB in June 2024 is about 1.9.

(Source: Company annual report, Chart: Market Capitalization APP)

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