Zhongtai: Maintain "Buy" rating for MAN WAH HLDGS (01999) with impressive growth in online domestic sales.

Zhongtai released a research report stating that it maintains a "buy" rating for MAN WAH HLDGS (01999), and domestic sales are expected to gradually recover as channel reforms progress. The company's FY26H1 revenue decreased slightly year-on-year, but with effective cost control, the gross profit margin improved. In terms of business, the decline in domestic sales market narrowed significantly, online channels performed well (+13.6%), and the overseas market showed operational resilience, especially with a slight increase in the North American market under trade barriers. Despite facing pressures such as tariffs, as a leading functional sofa company, the company's profitability has improved with the progress of channel reforms. Main views from Zhongtai: Performance The company released its FY2026H1 performance report, showing a narrowing decline in revenue. The company achieved operating income of HK$8.045 billion in FY26H1 (six months ended September 30, 2025), a year-on-year decrease of -3.1%; benefiting from cost control and operational efficiency improvements, the gross profit margin increased by 0.9 percentage points to 40.4% year-on-year, achieving a net profit attributable to owners of HK$1.146 billion, an increase of 0.6% year-on-year. In terms of non-recurring gains and losses, the net loss from other operations during the period was HK$33.48 million, mainly attributed to fair value losses on investment properties, a significant decrease from the loss of HK$1.09 billion in the same period last year. Significant narrowing of domestic sales and improvement in online channel performance FY26H1 revenue in the Chinese market (excluding real estate and smart components business) was HK$4.203 billion, a decrease of 6.5% year-on-year, with a significant decrease compared to FY25H2. 1) By channel: Online performance was outstanding, while offline store adjustments continued. FY26H1 online revenue was HK$1.144 billion, a year-on-year increase of 13.6%, surpassing expectations. Offline channel revenue was HK$3.059 billion, a year-on-year decrease of 12.3%. The optimization and adjustment of the company's offline channels continue to be implemented, with a net decrease of 327 stores to a total of 7,040 stores as of the end of FY26H1 compared to the end of FY25. 2) By category: Sofa sales remained stable, but pressure persisted on mattresses. Revenue from sofas and related products in the Chinese market was HK$3.084 billion, a year-on-year decrease of 6.1%. Sales volume remained relatively stable (+0.1%), with a slight decrease in average selling price, mainly influenced by the increase in online sales proportion. Revenue from mattresses and related products was HK$1.119 billion, a decrease of 7.4% year-on-year, primarily impacted by consumer downgrading in the Chinese market. Resilience in overseas markets 1) North American market: Revenue in FY26H1 was HK$2.161 billion, a slight increase of 0.3% year-on-year, demonstrating strong resilience amid escalating international trade barriers. 2) Europe and other markets: Revenue in FY26H1 was HK$765 million, an increase of 4.3% year-on-year. 3) Home Group business: Revenue in FY26H1 was HK$380 million, an increase of 2.2% year-on-year, mainly due to increased demand in the European market. Profitability improvement Profitability benefited from a decrease in raw material prices, with the overall gross profit margin of the group increasing to 40.4%, an increase of 0.9 percentage points year-on-year. This was mainly attributed to a decrease in average unit costs of major raw materials such as leather (-10.4%), chemicals (-9.8%), and steel (-6.8%). However, the US began to impose tariffs on Vietnam during the period, resulting in the company's tariff expenses for exports to the US increasing from HK$6.65 million in the same period last year to HK$78.83 million, with the revenue proportion increasing from 0.1% to 1.0%. Investment recommendations As a leading functional sofa company, the company is expected to continue to increase its market penetration rate under the trend of intelligent home furnishings; in the short term, although the company's domestic sales are under pressure, they are expected to gradually recover as channel reforms progress. Based on a slight downward adjustment in earnings forecasts for FY26H1, the projected net profit attributable to owners for FY26-FY28 are HK$2.19 billion, HK$2.32 billion, and HK$2.43 billion respectively (previously forecasted at HK$2.29 billion, HK$2.57 billion, and HK$2.82 billion), with corresponding PEs of 7.8, 7.4, and 7.0X, maintaining a "buy" rating. Risk factors Risks include lower-than-expected downstream demand, increasing market competition, significant fluctuations in raw material prices, and unexpected delays in capacity construction.