Guosen: Light industry in Q3 is facing pressure on operations, the outlook is stabilizing. Looking forward to stimulating domestic demand through trade-ins of old products for new ones.

Guosen released a research report stating that the light industrial manufacturing sector is under operating pressure and business conditions are reaching a bottom in 2024Q3, with expectations for the "trade-in old for new" policy to improve domestic demand. Due to the industry's strong cyclical nature and its strong correlation to the real estate sector, the industry's business conditions reached a bottom in the third quarter as external macroeconomic weakness and real estate pressures continued to transmit. Single-quarter revenue growth turned negative as a result of weak demand, increased industry competition, and high base effects, leading to a decline in profitability year-on-year and quarter-on-quarter. The home furnishings sector was particularly affected, with both revenue and net profit declining. The paper and packaging printing sectors also face issues of rising costs and weak demand, with the packaging printing sector performing relatively steadily due to the recovery in downstream demand. Guosen's main points are as follows: Home Furnishings: Increased operating pressure, with expectations for the "trade-in old for new" policy to improve domestic demand. In 2024Q3, the total revenue of listed companies in the home furnishings sector decreased by 2.7% year-on-year, while net profit attributable to shareholders decreased by 23.5% year-on-year. Gross profit margin decreased by 2.5 percentage points to 31.0% year-on-year, while net profit margin decreased by 2.0 percentage points to 7.4% year-on-year. Due to the transmission of real estate pressures, prolonged consumer price comparison cycles, delayed purchase decisions, and reduced terminal traffic, the domestic sales of home furnishings in Q3 remained under pressure, with retail and bulk sales generally declining. Dragonhead companies have continued to reduce costs and control expenses, but the decline in revenue has led to a passive increase in expense ratios, coupled with double concessions to consumers and distributors, resulting in a decline in profitability. Exports: Differentiated external demand trends, with profit affected by disruptions in shipping and exchange rates. In 2024Q3, the export market conditions for light industry weakened compared to the previous quarter, with China's furniture and parts exports decreasing by 7.5% year-on-year. As the restocking cycle nears completion and the base increases gradually, the export growth of furniture in Q3 slowed significantly compared to the 8.2% growth in Q2. In Q3, mattress, thermos bottle, height-adjustable desk, and artificial turf exports outperformed the market, with export growth rates of 15.2%, 11.4%, 2.3%, and 2.9% respectively. While sub-categories and industry leaders continue to achieve impressive growth, external disruptions such as shipping fees and exchange rates still impact the realization of profits. Papermaking: Rising costs, weak demand leading to narrowing profit margins. In 2024Q3, the revenue of listed companies in the papermaking sector decreased by 4.6% year-on-year, while net profit attributable to shareholders decreased by 73.6% year-on-year. Gross profit margin decreased by 2.1 percentage points to 9.1% year-on-year, while net profit margin decreased by 2.9 percentage points to 1.1% year-on-year. Since 2024, domestic demand and consumer confidence have continued to weaken, and in Q3, as overseas new production capacity for wood pulp came online and prices fell, cost support weakened, resulting in relatively sluggish paper prices in Q3. The use of high-priced pulp inventories has put some pressure on the profitability of leading companies, with profits per ton in Q3 significantly narrowing and profit differentiation. Integrated companies and specialty paper producers have better profit margins. Packaging Printing: Recovery in downstream demand, relatively stable operations. In 2024Q3, the revenue of listed companies in the packaging printing sector increased by 2.0% year-on-year, while net profit attributable to shareholders increased by 1.4% year-on-year. Gross profit margin decreased by 0.3 percentage points to 19.2% year-on-year, while net profit margin decreased by 0.04 percentage points to 6.0% year-on-year. Benefiting from the active recovery of downstream demand in sectors such as consumer electronics, home appliances, and food and beverages, Q3 packaging printing operations remained relatively stable, with revenue achieving single-digit growth. Upstream raw material prices remained relatively stable, leading to stable profitability and profit growth matching revenue. Entertainment Products: Steady revenue growth, profitability weaker than revenue. In 2024Q3, the revenue of listed companies in the entertainment products sector was 14.64 billion, an increase of 8.3% year-on-year, while net profit attributable to shareholders was 740 million, a decrease of 15.1% year-on-year. Gross profit margin decreased by 0.9 percentage points to 19.3% year-on-year, while net profit margin decreased by 1.4 percentage points to 5.0% year-on-year. In the entertainment sector, demand for stationery, personal care, and household cleaning products remained stable, with strong growth in pet products and significant room for product structure upgrades in lens products. Leading companies achieved rapid growth through structural adjustments, expansion of product categories, channels, and regions. In the short term, the sector was affected by consumer downgrading, increased investment in brand building, and the acceleration of leading companies entering the e-commerce sector, leading to a decline in profitability in Q3. Key metrics to watch: Market review: Light industry sector in October +1.85%, relative monthly return +5.0%. Home Furnishings sector: Retail sales of furniture in September +0.4% year-on-year, sales of building materials and home furnishings marketplaces -2.2% year-on-year; last week TDIs domestic spot price remained stable, and the market price of soft foam polyether rose by 25 yuan/ton. Pulp and paper prices: Last week, international market prices for soft/hardwood pulp remained stable, while domestic softwood pulp prices remained stable and hardwood pulp prices fell by 100 yuan/ton month-on-month; last week, domestic dissolving pulp prices remained stable, and waste paper spot prices rose by 4 yuan/ton; last week, market prices for duplex board and white cardboard remained stable and rose by 100 yuan/ton, while boxboard paper prices fell by 50 yuan/ton and corrugated paper prices rose by 30 yuan/ton. Real estate data: In September, China's residential property new construction/completion/sales areas decreased by 17.7%, 30.1%, and 11.0% year-on-year, respectively. In October, the transaction area of commercial housing in 30 major cities decreased by 3.8% year-on-year, while the transaction area of second-hand houses increased by 45.2% year-on-year. Export data: In October, the growth rate of China's furniture and parts exports was 2.5%. Investment recommendations: With the accelerated implementation of government policies in key cities, there is optimism for the operational and valuation recovery of leading companies in the home furnishings sector, with a focus on Oppein Home Group Inc. (603833.SH), Suofeiya Home Collection (002572.SZ), Jason Furniture (603816.SH), and Goneo Group (603195.SH); Focus on the resonance effects brought by the peak demand season for pulp, with a key recommendation for Shandong Sun Paper (002078.SZ) and a recommendation for Shenzhen YUTO Packaging Technology (002831.SZ), a boutique paper packaging leader with stable performance and high dividends; Recommend Shanghai M&G Stationery Inc. (603899.SH) for its steady traditional core business and rapid growth in new business in the entertainment sector; In the export chain, focus on cross-border e-commerce targets going overseas, and recommend Loc for its overseas warehousing business driving secondary growth.Tek Ergonomic Technology Corp. (300729.SZ)Risk warning: Consumer recovery falls short of expectations; real estate sales completion falls short of expectations; deterioration in industry competition landscape.