The 2022 results fell short of our expectations
The company announced 2022 results: revenue of HK$8.292 billion, -14.4% YoY, -10.9% YoY in constant currency; net profit of HK$33 million, -73.0% YoY. Among them, 2H22's revenue was HK$3,919 million, or -22.6% year on year; net profit to the mother was HK$35 million, +53.6% year on year. The performance fell short of our previous expectations, mainly because the blue-chip business was greatly affected by customer inventory removal.
Cybex and Evenflo maintained high increases, and GB is in a channel adjustment period. The company's strategic brand revenue in 2022 was -7.9% yoy to HK$7.063 billion; blue-chip business revenue was -43% yoy to HK$875 million, mainly due to a decline in orders caused by customers removing inventory. Among strategic brands, Cybex's revenue in 2022 was -2.9% year-on-year to HK$3,285 million, or +7.3% year-on-year in constant currency. The brand continued to expand its global distribution network and gain market share during the period; Evenflo's revenue was +16.2% year-on-year to HK$2,305 million. The brand's digital channels increased dramatically during the period, increasing its market share in the US; GB revenue was -35.9% year-on-year to HK$1,473 million, mainly affected by the epidemic in the Chinese market, and the brand was reforming wholesale channels.
Gross margin is basically stable, and profits are under pressure due to rigid expenses. The company's gross margin in 2022 was -0.8ppt to 40.5% year-on-year, mainly affected by increased costs, unfavorable exchange rate fluctuations, and an increase in the share of brand revenue with relatively low gross margins. At the same time, product price increases offset some of the effects. In 2022, the company's sales expense ratio was -0.6ppt to 25.0% year on year, and the management expense ratio was +1.5ppt to 16.2% year on year. Although the absolute value of expenses all declined, due to the rigidity of some expenses, the expense rate increased after revenue declined. Overall, the company's net interest rate to the mother in 2022 was -0.9 ppt to 0.4% year-on-year.
CEO changed to focus on Cybex development and the transformation of the Chinese market. On March 21, 2023, Mr. Liu Tongyou, the company's former CFO, took over as CEO, and Martin Pos, founder and former CEO of Cybex, became the executive chairman of Cybex. The company said this job change arrangement will allow Mr. Pos to focus on developing Cybex. At the same time, management will invest more energy in the Chinese market where the Group is relatively weak.
Development trends
We think brand business may rebound in 2023 as the global supply chain stabilizes. The company said that Cybex will expand channels globally, Evenflo will continue to increase its market share and launch innovative, more profitable products, and GB will reform wholesale channels, strengthen retail through its own channels, and increase profit margins.
Profit forecasting and valuation
Considering that the GB business is still in a period of adjustment and the blue-chip business is under pressure from overseas customers to remove inventory, we lowered the 2023 profit forecast by 40.4% to HK$109 million, and introduced the 2024 profit forecast of HK$244 million. The current stock price corresponds to 9.5 x and 4.2 x P/E in 2023 and 2024, maintaining a neutral rating. We lowered our target price by 25.5% to HK$0.66, corresponding to 10.0x and 4.5x P/E in 2023 and 2024. There is 5.7% upside from the current stock price.
risks
The recovery in overseas demand fell short of expectations, strategic brand development fell short of expectations, and there was a risk of exchange rate fluctuations.