1Q23 performance is in line with our expectations

The company announced 1Q23 results: revenue of 253 million yuan, -8.8% year on year; net profit of 14 million yuan, +8.9% year on year; net profit of Fumo was 102 million yuan after deduction, +10.9% year on year. The performance was in line with our expectations.

Development trends

Revenue growth is under pressure. The company's 1Q23 revenue fell 8.8% year on year. We think it's mainly because downstream government and enterprise customers bid and brand customers need a certain cycle to expand stores. Early orders have not yet been fully reflected in the report; at the same time, overseas channel inventories are high, and we expect the company's export business to still face some pressure. However, on a month-on-month basis, the year-on-year decline in 1Q23 revenue narrowed 1.9 ppt from 4Q22, showing a recovery trend.

Profitability has improved. The company's 1Q23 gross margin increased 0.7ppt year on year. We believe that on the one hand, thanks to the decline in upstream raw materials and overseas freight prices, the company's costs have declined, and on the other hand, it has benefited from the improvement in the company's product structure. In terms of period expenses, the company's expenses rate for the 1Q23 period increased 0.6ppt to 22.5% year-on-year. Among them, the sales, management, R&D and financial expenses rates changed +0.8/-0.1/-0.2/+0.1ppt to 10.9%/8.8%/2.7%/0.1%, respectively. The company's net interest rate to the mother in 1Q23 increased 0.9 ppt to 5.7% year on year, showing an improvement trend.

Products and channels are being promoted simultaneously, and follow-up developments are followed. 1) Product: The company continues to promote intelligent product construction, combines intelligent software technology with fitness equipment hardware technology, and launches the Shuhua Sports App. At the same time, six major solutions are used to dig deeper into segmented field requirements and promote the upgrade from a single solution service to a full-scenario system solution. Furthermore, in terms of categories, in line with consumer trends, advantageous categories such as treadmills are developing steadily while actively developing new categories such as exercise bikes. 2) Channels: In terms of offline channels, the company promotes the transformation and upgrading of terminal stores, increases resource investment for dealers, raises the level of refined marketing management for dealers, and focuses on subsequent progress. In terms of online channels, the performance of online channels in the fitness equipment industry was affected by the 2020 demand overdraft in the past two years, but Shu Hua still surpassed the industry and ranked at the forefront of Tmall in the middle and high-end categories. At the same time, the company promoted platforms such as JD's own operation and Pinduoduo, and revenue from the new platforms grew rapidly. On the export side, although overseas channel inventories put pressure on exports, the share of independent brands in exports increased, and profitability improved markedly as the business structure improved.

Profit forecasting and valuation

The profit forecast remains unchanged. The current stock price corresponds to 37/31 times P/E for 2023/2024, respectively. Maintaining an outperforming industry rating and a target price of 13.00 yuan corresponds to 38/33 times P/E in 2023/2024, respectively, with an upward margin of 4% compared to the current stock price.

risks

Channel development fell short of expectations; raw material prices fluctuated greatly.