DERUCCI HEALTHY SLEEP(001323)：LEADING MATTRESS BRAND CONTINUES TO THRIVE

　　Investment positives
　　We initiate coverage on DeRUCCI Healthy Sleep Co., Ltd. (DeRUCCI) with an OUTPERFORM rating and a target price of Rmb55, implying 27x 2022e and 22x 2023e P/E, with 26% upside. The stock now trades at 22x 2022e and 17x 2023e P/E. A leading mattress company, DeRUCCI is a strong brand with a diversified product portfolio. Continued penetration into lower-tier markets has helped sustain swift earnings growth. We are upbeat on the company’s rapid gain in market share, underpinned by its solid competitive advantages.
　　Why an OUTPERFORM rating?
　　Ample growth potential in domestic mattress market. Mattress sales in China totaled Rmb66.9bn in 2021, and Euromonitor estimates a CAGR of 8.1% over 2021-2026. Combined market share of the top five mattress brands equaled 21.6% in China in 2021, indicating strong market potential compared with 57.7% in the US, in our opinion.
　　Solid brand awareness and omni-channel presence to boost growth ahead. DeRUCCI is a well-known Chinese mattress brand. The gross margin (GM) of the company’s mattress business was 57% in 2021, well above the industry average. DeRUCCI has developed a diversified distribution network comprising more than 1,900 distributors and over 4,900 retail stores. The company also reaches its target clients via other channels such as direct supply and e-commerce.
　　Broad product portfolio and swift growth in both online and offline sales. DeRUCCI’s home furnishing brand V6 Home mainly targets lower-tier markets. According to the latest data available, V6 Home opened more than 1,000 stores in over 600 cities as of May 2021, and its bundled sales of living room and bedroom products have helped enhance transaction per customer and contribute additional revenue. DeRUCCI plans to open 1,000 stores per year while strengthening its online presence. Revenue contribution from e-commerce platforms rose to 13.7% in 2021 from 10.4% in 2018.
　　How do we differ from the market? We think the market is overly worried about the potential negative impact of slowing housing sales on DeRUCCI’s business expansion. Given the relatively low market concentration in the home furnishings industry, we believe the company will increase market share by leveraging its advantages in branding, product offerings, distribution channels and supply chain.
　　Potential catalysts: Raw material cost decline; execution of pro-growth policies.
　　Financials and valuation
　　Our EPS forecast is Rmb2.03 in 2022 and Rmb2.54 in 2023, implying a CAGR of 22%. We are upbeat that DeRUCCI will maintain robust growth backed by its strong brand awareness, broad product portfolio and rapid channel expansion. We initiate coverage with an OUTPERFORM rating and a target price of Rmb55, implying 27x 2022e and 22x 2023e P/E, with 26% upside.
　　Risks
　　Raw material cost changes; intensified industry competition; disappointing channel expansion; high marketing expense.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。