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The impact of non-performing real estate loans on the home furnishing industry is gradually diminishing, but some companies have not yet achieved a "turnaround in adversity."

Dio Home, a listed company primarily engaged in the ceramic sanitary ware business, recently announced that it has entered into debt restructuring agreements with 13 real estate companies, including Country Garden, Vanke, Sunac Holdings, Agile Property, and others. These real estate firms have "settled debts with properties," paying a total of approximately 220 million yuan to Dio Home for goods.

Behind the "settling debts with properties," Dio Home has not been without its troubles. After a net loss of 1.5 billion yuan in 2022, it suffered another loss of 658 million yuan in 2023.

The market size of China's ceramic sanitary ware industry exceeds 300 billion yuan. Influenced by the characteristics of the industry, it is deeply "entangled" with real estate developers, and many companies have developed a "dependency on major customers." As some real estate firms face sluggish sales and delayed payments, these ceramic sanitary ware companies are also mired in difficulties. According to statistics, the total amount of bad debt provisions for 13 listed ceramic sanitary ware companies in 2023 reached 4.268 billion yuan, exceeding the total annual net profits of these companies.

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More than 80 properties offset over 200 million yuan in debt

Recently, Dio Home (002798.SZ), which is primarily engaged in the production and manufacturing of architectural ceramics and sanitary products, announced that it will undertake debt restructuring with 13 real estate companies to reduce the risk of bad debt losses from accounts receivable and to guard against credit risks arising from adjustments in the real estate market.

The real estate companies involved include Country Garden, Vanke, Sunac Holdings, Agile Property, Lingdi Group, Longhu Group, Hopson Development, Langji Real Estate, Logan Group, Midea Property, Rongsheng Real Estate, CIFI Holdings, and Zhongnan Construction.

These well-known real estate firms have resolved the issue of project payments to Dio Home through the method of "settling debts with properties," with the latter receiving a total of more than 80 properties (including residential, apartments, office buildings, etc.) and nine parking spaces.

Dio Home stated that since the second half of 2021, some real estate companies have experienced sluggish housing sales and increased financing difficulties, leading to debt defaults or liquidity crises. The liquidity crunch of real estate companies has resulted in difficulties in paying project payments and goods payments, increasing the operational risks for the company in terms of the timeliness and safety of accounts receivable collection. The overall progress of accounts receivable collection has been delayed, and the business funds have been weak in recycling. After reaching a consensus with the debt restructuring parties, the company has carried out debt restructuring to resolve the potential bad debt loss risks of accounts receivable through the method of settling debts with properties, reducing the uncertainty risks associated with the recovery of related business payments.

The total amount of these "debt-offset properties" is 225 million yuan (including value-added tax), which is used to offset the total debt of 220 million yuan owed by the aforementioned real estate companies to Dio Home. The difference of 5.027 million yuan is settled in cash by Dio Home.This announcement reflects that Di'ao Home Furnishings has not yet completely extricated itself from the quagmire of bad debts from real estate projects. Di'ao Home Furnishings was originally the Sichuan-based enterprise Emperor Sanitary Ware, established in 1994, which initially focused on the sanitary ware category and went public on the A-share market in 2016. In the same year, Emperor Sanitary Ware initiated a merger and acquisition plan, acquiring the Foshan Ousinuo Ceramics Co., Ltd., which was three times its size, in a "snake swallowing an elephant" manner. This was the first ceramic enterprise in Foshan to be listed on the New Third Board at that time. After successfully acquiring Ousinuo, Di'ao Home Furnishings transitioned from the sanitary ware industry to the ceramic tile industry and initiated an expansion plan. At that time, China's real estate industry was booming, with the annual sales of newly built commercial housing soaring from 13 trillion to 18 trillion from 2017 to 2021. However, starting from the second half of 2021, with the changes in the real estate environment, many upstream and downstream industries also suffered severe impacts. In 2022, Di'ao Home Furnishings' revenue was 4.1 billion yuan, a decrease of 30% year-on-year, with a net loss exceeding 1.5 billion yuan, marking its first loss since going public. In 2023, Di'ao Home Furnishings continued to endure the pains of industry changes, with operating income of 3.76 billion yuan, a year-on-year decline of 8.55%, and a net profit attributable to shareholders of listed company owners of -658 million yuan, failing to turn losses into profits. Regarding the reason for the decline in revenue, Di'ao Home Furnishings attributed it to a significant drop in income from the engineering channel. "Affected by the continuous downward pressure of the downstream real estate industry, the demand from major customers in the engineering channel has continued to wane; to continuously balance the overall business risks and operational quality of the company, the company strictly controls the risks of engineering business, and continuously adjusts and optimizes the structure of major customers in the engineering channel," Di'ao Home Furnishings stated in its 2023 annual report. This is also a common problem faced by home furnishing and decoration companies that take real estate developers as their main large customers and place too much emphasis on the real estate project channel.Can Taowei Enterprises Break Free from the Downward Trend?

In the past 2-3 years, many home decoration and furnishing companies have encountered "minefields" with real estate clients, facing the issue of overdue accounts receivable. Orders from traditional project channels have also been on a continuous decline. In response to these situations, many enterprises have strived to "steer a new course," on one hand, transforming their channels, and on the other hand, strengthening the development of emerging markets.

Looking at the annual reports from 2023, many home decoration and furnishing companies have gradually emerged from the shadow of stepping on real estate "mines." Particularly, industries such as whole-house customization, soft furnishing, kitchen appliances, flooring, and coatings have seen leading enterprises turn losses into profits, with significant results from channel reform.

However, as of now, the overall performance of listed companies in the ceramic sanitary ware industry has been rather lackluster. Among the 13 major listed companies, six experienced a year-on-year decline in revenue in 2023. Huida Sanitary Ware, Seagull Home, and Di Ou Home's net profits are still in the red, with five companies seeing a decline in net profits. The total provision for bad debts among the 13 listed companies amounts to 4.268 billion yuan, which has exceeded the total annual net profit of these 13 listed companies (3.95 billion yuan), increasing by nearly 1.1 billion yuan compared to 2022.

China's ceramic sanitary ware industry is vast, but the industry concentration is very low. According to Wind statistics, there are over ten thousand ordinary enterprises, more than a thousand scaled enterprises, and only a dozen listed companies.

Currently, the annual market size for China's architectural ceramics and sanitary ceramics totals over 300 billion yuan. According to "Zhiya Consulting," the market size in 2022 was approximately 325.86 billion yuan. Of this, the sanitary ceramic market share accounted for 19.2%, while the architectural ceramic market share was 80.8%.

Affected by the decline in demand in the real estate market, both the supply and demand sides of the ceramic sanitary ware industry are shrinking.

According to "Zhiya Consulting," in 2022, the production of Chinese ceramic tiles was 8.05 billion square meters, a decrease of 1.47% year-on-year; the demand was 7.54 billion square meters, a decrease of 1.82% year-on-year. In 2022, the production of Chinese sanitary ceramics was 2.15 million pieces, a decrease of 3.1% year-on-year; the demand was 126 million pieces, a decrease of 7.1% year-on-year.

"Compared to other categories, Taowei enterprises have been more dependent on large real estate clients in the past, which is determined by the characteristics of the industry. Therefore, the Taowei industry has been more affected in the past two to three years, showing an overall downward trend," a senior practitioner in the home decoration industry told First Financial Daily.

The individual believes that the future of the industry lies in product research and innovation. "On one hand, the decline in real estate sales and the shrinkage of demand, but on the other hand, the domestic consumption level is improving, and the country is also encouraging the renewal of home decoration, the demand for high-end Taowei products will definitely increase, the industry will clear out low-end enterprises, and the market share of low-end products will become less and less."Additionally, vigorously carrying out channel transformation is the direction for many enterprises. In the past, the main channel for Di Ou Home Furnishings was "dealers + traditional project channels." Faced with losses, Di Ou Home Furnishings stated that the company will focus on enhancing the operational capabilities of retail terminal channels in the future, with a core emphasis on building a comprehensive channel marketing system centered around "retail, home decoration, engineering, terminals, and e-commerce."

Among the listed companies in the ceramic sanitary ware industry, Dongpeng Holdings has seen a relatively quick recovery in performance in 2023, achieving growth in both operating income and net profit attributable to the parent company. Looking at the channel structure, Dongpeng has historically relied less on project channels, with "dealers + direct sales" being its main model, thus avoiding the risk of dependence on large clients. In 2022, C-end retail accounted for nearly 50% of Dongpeng Holdings' sales revenue, and in 2023, the retail channel's performance share reached 71%. He Ying, Vice Chairman and President of Dongpeng Holdings, stated at the 2024 Dongpeng Dealers Summit that the company will conduct a comprehensive analysis of the four major channels: retail, engineering, whole-house decoration, and designers, to accurately respond to market demands.

Di Ou has also expressed its commitment to strongly support the operation and development of terminal retail, promoting alliance merchant programs such as the "Central City Strong Merchant Plan" and "Regional Alliance," and will also develop designer channels. Relying on the resources of designer circles, the company aims to drive traffic to its products and brand, enhancing brand value. In terms of retail channel construction, Di Ou stated that it will fully utilize new media marketing platforms such as the brand's official account, Xiaohongshu, Douyin, and Kuaishou to explore the creation of an "online + offline" "new retail" marketing model. In addition, the company noted the market demand for "old house renovation" and will assist dealers in actively expanding the renovation business of sanitary spaces in local old residential areas, seeking to increase in the existing market. The company will also continue to develop government platform and municipal construction project businesses.