The third-quarter industry trend aligned with our previous expectations. In our mid-term strategy, we anticipated that the furniture sector would maintain strong performance in the second half of the year, and we assigned it an "overweight" rating. In terms of market performance, the furniture industry index outperformed the broader market during the third quarter. As of now, the furniture industry index has risen by 28.85%, while the Shanghai and Shenzhen 300 index increased by 12.34% over the same period, outperforming by 16.51 percentage points. Notably, individual stocks like Yihua Wood (up 20.73%), Xilinmen (up 37.29%), and Meike (up 23.79%) have shown strong performances.
Despite the positive momentum, the furniture industry is currently facing four key challenges: (1) a shortage of forest resources, (2) a weakening export pull effect, (3) most manufacturers being concentrated in manufacturing, with limited control over retail channels, and (4) low industry concentration, leading to chaotic competition and inconsistent quality standards.
Looking ahead, we expect several more predictable trends to shape the future of the industry. First, as panel furniture gains market share from solid wood furniture, companies producing high-quality artificial boards will gain more pricing power. Second, enterprises with significant forest resource reserves will enjoy stronger cost control and profitability. Third, the industry is shifting from export-driven growth to domestic demand, highlighting the importance of strong domestic channels and brand presence. Fourth, differentiated competition, along with technological and business model innovations, will become key drivers for market leadership. Finally, reorganization within sub-sectors is expected to increase overall industry concentration.
From a long-term value investment perspective, companies with strategic advantages in critical areas are particularly attractive. For example, Daya Technology, which leads in wood-based panels, Qifeng Shares, a top player in decorative base paper, and Yihua Wood, with its extensive precious log reserves, offer strong investment potential due to their competitive positioning. Additionally, the growing importance of domestic demand means that traditional manufacturers transitioning to brand-focused retail models are likely to gain consumer favor and better pricing power. Sofia, a leader in customized furniture, is actively transforming, while Xilinmen benefits from early shifts from exports to domestic sales. Meike, with its strong brand development, also presents compelling investment attributes.
On the short-term performance front, the recovery in real estate since last year has created a lagged impact on furniture sales. With domestic sales expected to continue improving in the second half of the year, companies like Sofia, Meike, and Xilinmen—known for their strong domestic channels and brand presence—are well-positioned for sustained growth. Meanwhile, Yihua Wood, which holds the largest share of U.S. furniture exports, is benefiting from the ongoing recovery in the U.S. real estate market and is in a strong position for continued performance growth.
In terms of industry rating and stock recommendations, the furniture sector is undergoing structural upgrades, offering long-term investment value. Improvements in both internal and external operating conditions are providing supportive factors for this year's performance. Whether considering long-term value or short-term growth, the sector presents clear investment opportunities. With the upcoming peak decoration season in the fourth quarter, the industry is expected to remain strong, maintaining its "overweight" rating. We recommend focusing on Yihua Wood, Xilinmen, and Sofia.
**Risk Warnings:** (1) Excessive tightening of real estate regulations; (2) A global economic downturn affecting furniture exports; (3) Significant increases in raw material prices. (Editor: Peter)
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