Fumo's net profit in 2022 was in line with our expectations. The adjusted net profit of the company was higher than our expectations for the company's 2022 results: the company achieved revenue of US$50,041 million in 2022, -2.12% year on year; net profit of Fumo was US$332 million, -20.98% year on year; adjusted net profit of 394 million US dollars, -15.1% year on year. Corresponding to 2H22, the company achieved revenue of 2,809 million US dollars, or -3.51% year on year; net profit of Homo was 168 million US dollars, -25.85% year on year; adjusted net profit of 205 million US dollars, -17.71% year on year. The company's net profit to the mother was in line with our expectations. The adjusted net profit to the mother was higher than our expectations, mainly due to the return of the one-time bonus account of about 34 million US dollars.

SN's performance was superior to the industry, and its market share continued to increase: 1) The company's revenue performance remained relatively steady throughout the year. Among them, the SN division 2H22 achieved a slight increase in revenue, which was superior to US e-commerce retail sales of 2H22 by -4.3% year on year, and also surpassed the year-on-year revenue performance of Youshang SEB, Delonghi, and iRobot 2H22 by -3%, -4%, and -32% year-on-year. If calculated at a fixed exchange rate, the company's annual revenue was +0.7% year-on-year.

2) The company's logic for increasing market share in Europe and the US has been continuously verified. In 2022, the company's market share of cleaning appliances and food cooking appliances in the US was +2.6ppt and +2.7ppt respectively. In the UK, the company's vacuum cleaners, electric cookers, and deep fryers have achieved high market shares of 32%, 60%, and 43% respectively in 2022, and the number of air fryers has grown brilliantly. 3) In terms of new products, the company's market shares of hair care products, air purifiers, and ice cream machines in the US in 2022 were +6.6ppt, +3.4ppt, and +36.8ppt, respectively.

Inventory removal progressed smoothly, improving placement efficiency: 1) The gross margins of the 2H22 SN segment were -0.3 ppt and -4.6ppt compared to the previous month, respectively, mainly due to the company's discount promotions to speed up the inventory removal process. The company's inventory for the end of 2022 was reported -22.8% month-on-month, and inventory removal progressed smoothly. 2) The company's annual advertising expenses and channel marketing expenses were -7.4% and -4.1% year-on-year, mainly due to more prudent marketing in the US and the focus on improving marketing efficiency. In Europe, the company continues to maintain a more aggressive marketing strategy to establish a brand image and increase brand awareness.

Development trends

The proposed split of SN's independent listing in the US will help improve valuation: 1) The company issued an announcement in February and expects to complete the proposed spin-off and proposed distribution by the end of 2023. After the spin-off, the company's shareholders will simultaneously hold shares in the company and SN listed in the US. 2) We estimate that in 2022, SN Group accounted for about 80% of the company's adjusted net profit. Assuming that this ratio is maintained, and taking into account capital market fluctuations and issuance adjustments, assuming that US stocks have a P/E valuation premium of 6x or more compared to Hong Kong stocks under a neutral situation, we estimate that SN's US listing will increase the valuation premium of the company's shareholders by about 66%.

Profit forecasting and valuation

We kept the company's net profit to the mother basically unchanged in 2023 and 2024. The current stock price corresponds to 9 times the 2023 price-earnings ratio and 8 times the 2024 price-earnings ratio. Maintaining an outperforming industry rating and maintaining the target price of HK$13.10, corresponding to 15 times the 2023 price-earnings ratio and 12 times the 2024 price-earnings ratio, there is 63% room for improvement compared to the current stock price.

risks

The proposed independent listing plan of the branch company falls short of the anticipated risk; the risk of fluctuations in overseas demand.