The 2022 results were in line with market expectations. The 1Q23 results were basically in line with our expectations and reliable shares announced the 2022 results: revenue of 1,186 million yuan, -0.01% year-on-year; net loss for homemu was 43 million yuan, in line with market expectations. The main reason for the loss of performance was that the company calculated a fixed asset impairment reserve of 60 million yuan for the mask production line and Hangzhou Keai Company's baby care products production line. At the same time, the company announced 1Q23 results: revenue of 319 million yuan, -0.9% year on year; net profit of 11 million yuan, +466.9% year on year, which is basically in line with our expectations.

Development trends

1. In 2022, independent brands of adult incontinence products grew steadily, and high-priced raw materials suppressed gross profit margins.

In 2022, the company's revenue fell 0.01% year on year, and gross margin fell 5.5 ppt year on year, mainly due to the high overall prices of raw materials such as wood pulp and polymers. By product, ① Baby care products:

Affected by the continuous decline in the infant birth rate and the reduction in the diaper ODM business, 2022 revenue was 528 million yuan, -13.8% year on year; gross margin was 12.6%, year on year -4.7 ppt; ② Adult care products: Benefiting from continued aging trends and increased penetration rate, 2022 revenue was 536 million yuan, up 15.6% year on year; gross margin was 12.8%, year on year -7.0ppt; ③ Pet care products: 2022 revenue was 96 million yuan, up 9.8% year on year; gross margin was 3.9%, year on year Decrease 4.3 ppt.

2. In 1Q23, revenue from self-released brands increased by 24% year on year, and profitability recovered steadily. 1Q23 The company's revenue fell 0.9% year on year, with independent brand revenue +24.1% year on year, maintaining rapid growth, while the ODM business is still in an adjustment period, and revenue is under pressure. 1Q23 gross margin was 16.6%, +4.5ppt year on year and +1.8% month on month. We expect the cost rate for the period to be 11.4%, +0.6ppt year on year. Thanks to the company's enhanced lean management, cost reduction and efficiency, the sales/management/R&D expense ratio declined steadily, and the financial expense ratio was +1.3 ppt, mainly due to a year-on-year decrease in exchange earnings. Under comprehensive influence, 1Q23 net interest rate was 3.5%, an increase of 2.9ppt over the previous year.

3. Deeply involved in the field of adult incontinence products, channel expansion and category expansion help to grow. Looking forward to the future, on the basis of continuously improving its brand power, the company is developing both online and offline channels. On the one hand, the online channel invests in more brand promotion and differentiated products to consolidate its competitive advantage online. On the other hand, it strengthens the layout of channels such as stores around hospitals, OTC pharmacies, nursing homes, and government procurement, etc., to expand the consumer base while strengthening consumer education. In addition, the company continues to enrich and optimize its product matrix. In 2022, the company launched products such as “Zizhi” brand safety pants and sanitary napkins, which focus on women's health care, and launched “reliable” brand light incontinence care high-end products such as invisible absorbent towels, absorbent pads for men, etc. We expect high-end products to drive revenue growth and increase gross margin.

Profit forecasting and valuation

Considering that the ODM business is still in an adjustment period, we lowered our 2023 net profit by 18% to 104 million yuan, and introduced net profit of 160 million yuan in 2024. The current stock price corresponds to 31/20 times the 2023/2024 price-earnings ratio. Considering the good development momentum of the company's own brand, it maintains an outperforming industry rating and target price of 12.4 yuan, corresponding to 32/21 times the 2023/2024 price-earnings ratio, and has 6% room for increase from the current stock price.

risks

The risk of fluctuations in raw material prices; the risk of increased competition in the industry; policy progress falls short of expectations.