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On July 21, Sophia issued an announcement stating that it would acquire a 40% stake in Henan Evergrande Sophia Furniture for 160 million yuan. The transaction method is processed in a way of offsetting debts, and there is no need to transfer and pay the actual cash payment. After the completion of this transaction, Sophia will own 100% equity of Evergrande Sophia.

With Evergrande’s growing debt pressure, Sophia, as an “excellent supplier” of Evergrande, has chosen to redeem the debt into equity in the joint venture company, which is now the best choice. However, as the Evergrande crisis continues to spread, Sophia is also facing a reorganization of its development strategy.

With a market value of more than 100 billion yuan, Shangpin Home Delivery has undergone a comprehensive transformation, and Sophia has reached a crossroads, the midfield battle in the custom furniture market has gradually entered the most critical moment.

1

The worst choice and the most critical choice

In fact, Evergrande’s lack of money is not the latest news. Evergrande has always maintained a high debt, high leverage, high turnover and low cost operation mode. Although this is a common phenomenon among real estate companies, as one of the largest real estate companies in China, both the scale of debt and the degree of debt are larger than other companies.

On August 20, 2020, the Ministry of Housing and Urban-Rural Development and the People’s Bank of China held a "Key Real Estate Enterprise Symposium" in Beijing, and clarified three red lines: the debt-to-asset ratio excluding advance receipts must not be greater than 70%; the net debt ratio must not be greater than 100 %; The cash short-term debt ratio shall not be less than 1 time.

The proposal of the red line made Evergrande, which was able to flicker with its strong political-business relations in previous years, has become more and more constrained. According to its 2020 financial report, the debt-to-asset ratio excluding advance receipts is 83.4%, the net debt ratio is 159.2%, the cash short-term debt ratio is 0.4, and the debt within one year is as high as 1,177.1 billion yuan.

Under this circumstance, Hengda Dalian Bank's money is still unrepayable, and the supplier wants to get the money in no time.

In 2016, Evergrande and its small partners such as Sophia, Xilinmen, and Qumei in the home furnishing industry alliance signed a contract with the Lankao County government to build a home furnishing alliance industrial park in the local area with a total investment of 10 billion.

The cooperation model between Evergrande and the settled company is that the two parties jointly establish a subsidiary to operate the industrial park project, and Evergrande Sofia is one of the settled enterprises and has also achieved profitability.

Therefore, Sophia finally chose to offset stocks and debts, which is now the worst choice.

Evergrande’s dilemma is actually the epitome of the entire Chinese real estate industry. With the increase in control measures, real estate will gradually bid farewell to the era of rapid growth. The growth rate of orders for customized furniture from real estate developers will drop visibly. Sophia’s next step Vital.

2

Under bulk dependence

Sophia's dilemma

In 2014, Sophia and Evergrande reached a strategic cooperation. Since then, the cooperation between the two parties in the field of home furnishings has become increasingly close, especially with the rapid advancement of China's real estate market, Sophia's performance is almost tied to Evergrande.

According to the information disclosed by Sophia, the first phase of the Evergrande Sophia Industrial Park project in this transaction will mainly supply 340,000 sets of production capacity to the real estate and areas of Evergrande Group. Evergrande also promised to purchase limited products produced by the company. .

The benefits of this in-depth cooperation are obvious, that is, the B-end bulk business provides companies with huge incremental space. In particular, the deep bond with the Chinese real estate hegemon has not only brought a stable B-end business to Sophia, but also provided enough room for imagination for its capital story.

The cooperation with Sophia and Evergrande is getting better at the same time, but Sophia's stock price has been rising steadily. With the joint construction of the plant by the two parties in 2017, Sophia's share price also reached a top of 39.246 billion on October 25. On the same day, the market value of Oupai was 51.199 billion yuan, and Shangpin Home Delivery was 18.01 billion yuan.

This kind of prosperity based on the disorderly growth of real estate is ultimately just a dream. With the gradual introduction of control measures, real estate has been significantly curbed, and Sofia’s good days have come to an end, the most obvious of which is the cliff-like decline in revenue growth.

The decline in revenue growth is not the most serious. The high-leverage operation mode of real estate companies is destined to not have much money on their hands in the down cycle. This pressure will be directly transmitted to home furnishing product suppliers along the supply chain.

Especially for Sophia, it is even more miserable. Among the top five accounts receivable balance of Sofia in 2020, Evergrande stands out, reaching 188 million yuan, accounting for 21.31%. And this is already the result of a sharp drop in the proportion.

According to Sophia's financial report, the balance of accounts receivable of its Evergrande department in 2018 and 2019 was 192 million yuan, accounting for 44.57%, and 187 million yuan, accounting for 25.98%. Correspondingly, its turnover days have also increased from 15.52 days in 2018 to 33.06 days in 2020.

In the face of this predicament, it is basically more difficult to reverse the situation. The huge purchase volume of bulk business has severely compressed the profit margin of the company, but it has also digested the large scale of the company's production capacity.

When companies want to transform, they often face balance and trade-offs, so this process will take a long time, but the market often doesn't have much time for you.

In addition to the fact that real estate has led to a large increase in bulk business space, Sofia's dealer system has also been relatively complete. As of 2020, there are more than 4,000 terminal stores in Sophia, covering 1,800 cities and regions across the country, while there are only 2,856 county-level districts in China.

Regardless of whether it is a large-scale business or the installation of terminal stores, they have basically entered the dilemma of peaking increments. For Sophia, as the custom furniture market is gradually becoming clear, if no significant changes are made, the revenue will see The top is almost visible to the naked eye.

3

Custom furniture

Midfield battle

The time comes to 2021. After the baptism of the epidemic, the custom furniture market pattern has gradually become clear.

Oupai Home Furnishing has withstood the test of the epidemic, with revenue of 14.74 billion yuan, an increase of 8.91% against the trend, and non-net profit of 1.935 billion yuan, a year-on-year increase of 15.14%.

With the improvement of the epidemic situation in March, the stock price of Opal Home also pressed the accelerator key at the same time, from a low of 37.2 billion, breaking through 100 billion all the way, and finally reached a high of 102.6 billion in April this year.

Regardless of the financial data, or the market value level, Oupai has widened the distance between itself and Sophia and Shangpin Home Delivery, faintly occupying the leading position in the industry.

Of course, if the companies behind them are willing to drink soup, they are not unable to live. After all, the concentration of the market always has a ceiling, and mature markets can often accommodate 3-5 core companies. But for the custom-made furniture companies and their helms that have just gone through the barbaric growth, they will naturally not stand still.

Therefore, we see that after entering 2021, Shangpin Home Delivery, which has experienced three years of performance growth decline, stock price decline, and major shareholders' divestment, resolutely chose a comprehensive transformation and refurbishment.

Li Lianzhu believes that as the real estate dividend fades, the refurbishment will better meet the refurbishment needs of second-hand housing and stock housing, and it can also effectively improve the status quo of traditional decoration companies that are difficult to comply with and make profits and scale expansion.

The financial report is also very face-saving. Shangpin Home Delivery achieved a net profit of 7.91 million in the first quarter of 2021, and for the first time since its listing in 2017, it achieved a profit in the first quarter.

Under this circumstance, after Sophia chooses to convert Evergrande’s debt into equity, it will inevitably face the problem of reducing the proportion of the bulk business and diversifying the risks of the bulk business.

The next step is Sophia's direction after getting rid of bulk business dependence, but it did not show a strong enough desire for transformation in the 2020 annual report.

In determining the development trend, Sophia believes that the current custom furniture market has a small base and large development space. With the development of the economy, consumers are increasingly favoring custom furniture, and the track growth rate is significantly higher than the overall level of the furniture industry.

For the development strategy, Sophia will adhere to the established development strategy, focus on the brand strategy of "customized cabinet experts", and deepen the group strategy of "omni-channel + multi-brand + full-category".

Looking at Sophia's 2021 plan, the main new direction may also be the whole outfit. Sophia clearly stated in the annual report and the first quarter report that the self-service and home improvement channels will become the company's new growth point.

However, Sofia’s full-package sales in 2020 is only 74.1731 million yuan, which can only be regarded as a touch of water. In contrast, Shangpin Home Delivery’s self-operated self-installation channel revenue in the first quarter was 96.71 million yuan, while Sophia’s revenue was only 39.9071 million yuan.

If you stick to the position of customized furniture, without major decision-making errors, another turning point may be the progress of digital transformation and product development system, but its R&D investment is also not outstanding.

According to the 2020 financial report of Opal, Shangpin Home Delivery, and Sophia, Opal invested 699 million in R&D last year, accounting for 4.74% of revenue; Shangpin’s R&D investment of 246 million yuan, accounting for 3.78% of revenue; Sophia’s R&D investment was only 2.10 100 million yuan, accounting for 2.51% of revenue.

In any case, after the first 30 years of barbaric growth, the custom furniture industry has reached a critical turning point.

With the advantages of Oupai gradually showing and the comprehensive transformation of Shangpin Home Delivery, Sophia faces a key choice for its own business direction, and even a key choice that affects the direction of the custom furniture midfield battle.