Performance summary: The company released the 2022 annual report and the first quarter report of 2023. In 2022, the company achieved revenue of 6.0.2 billion yuan, a decrease of 24% over the previous year; realized net profit of 100 million yuan to the mother, a decrease of 77.7% over the previous year; and realized deduction of non-net profit of 140 million yuan, a decrease of 1.1% over the previous year. Non-recurring losses stem from loss of disposal of company assets and loss of investments holding transactional financial assets. Looking at a single quarter, Q4 achieved revenue of 1.33 billion yuan, a year-on-year decrease of 36.8%; it achieved net profit of 0.3 billion yuan, a year-on-year decrease of 78.1%. In Q1 of 2023, the company achieved revenue of 1.18 billion yuan, a year-on-year decrease of 25.3%; the net profit of its mother was 0.2 billion yuan, a year-on-year decrease of 30.8%. The company expects to distribute a cash dividend of 3 yuan for every 10 shares to all shareholders, and an estimated cash dividend of 190 million yuan, with a dividend rate of 183.3%.

Industry demand is low, and short-term earnings are under pressure. Under the impact of multiple factors such as shrinking domestic demand, supply shocks, and weakening expectations, the global health massage product consumer market was greatly impacted in 2022. The company's offline consumption scenario and supply chain were blocked. Massage chairs, small massage appliances, health environments and other products achieved revenue of 24.9/19.5/82/63 billion yuan respectively, with year-on-year changes of -18.5%/-20.2%/-19.9%/-47.5%. By region, the company achieved revenue of 1,27/4.61 billion yuan at home and abroad, a year-on-year change of -25.2%/-23.3%. In 2022, the company continued to focus on the health massage business, continuously adjusted and optimized the business structure, divested and reduced non-core business. The share of revenue from other businesses fell 4.8% year-on-year, and the share of health massage business revenue increased to 75.4%.

Deepen change margin optimization. In 2022, the company initiated efficiency reforms, and a series of measures such as the company's excellent management and asset management achieved positive results in reducing costs and increasing efficiency. The company's comprehensive gross margin in 2022 was 32.2%, up 2.4 pp from the previous year.

Among them, the Q4 quarterly gross margin was 40.1%, an increase of 9.4 pp over the previous year. We believe that the company's internal changes have paid off, and that the cost side continues to be optimized. In addition, the decline in raw material prices in 2022 also had a positive impact on the company's gross margin. In terms of cost rate, the cost rate increased during the period due to the reduction in the company's annual revenue scale. The company's sales expense ratio was 18.4%, up 3.6 pp year on year; management fee rate was 10.7%, up 1.1 pp year on year; financial expense ratio was -1.7%, down 3.5 pp year on year, mainly due to fluctuations in the RMB exchange rate. Taken together, the company's net interest rate was 1.8%, a year-on-year decrease of 4.1 pp.

The results of cost reduction and efficiency increase were remarkable, and Q1 profits were improving. Against the backdrop of weak demand in overseas markets and a gradual recovery in domestic demand, 2023Q1 companies' revenue continued to decline, but the decline narrowed from the previous year's Q4 decline. In the future, with the further recovery of domestic demand, the removal of inventories combined with overseas channels will come to an end, and it is hoped that the company's revenue will return to a healthy pace of growth. On the profit side, 2023Q1's comprehensive gross margin was 39.9%, an increase of 11 pp over the previous year.

We speculate that the company's deepening changes are mainly compounded by falling raw material prices and optimization of cost-side holdings. In terms of expense ratio, the company's sales expenses rate/management expenses rate/financial expenses ratio was 22.8%/12.4%/2.8%, an increase of 5.7/1.8/0.6 pp over the previous year. We believe that in the short term, the company's revenue scale will shrink, while expenses such as store rent and staff wages are more rigid, and the overall cost rate will increase. Taken together, the company's net interest rate was 1.7%, an increase of 0.1 pp over the previous year.

Focus comprehensively on core business to help enterprises develop and break the game. (1) The company concentrates superior resources on the main health and massage business and its own brand business to strengthen independent brand product innovation, brand marketing and channel construction. During the reporting period, the revenue share of the company's health and massage business and its own brand business increased by 4.2% and 3.1% respectively. (2) The company focuses on pre-research and development of cutting-edge technology in the big health industry and continues to build core competitiveness in the health massage field. In 2022, 250 million yuan was invested in R&D. By the end of the reporting period, a total of 1,356 patents had been obtained.

(3) The company drastically cut non-core, non-profit, and high-investment projects, quickly divested and shut down 7 subsidiaries unrelated to the company's main business, and further optimized its business structure.

Profit forecasts and investment recommendations. As demand in the domestic and foreign massage and health care markets gradually picks up, the company's operations are expected to recover steadily as a leading enterprise in the industry segment. The company's EPS is expected to be 0.47/0.52/0.6 yuan respectively in 2023-2025, downgraded to the “hold” rating.

Risk warning: the risk of large fluctuations in the RMB exchange rate, the risk of large fluctuations in raw material prices, and the risk that demand in the terminal market will not recover as much as expected.