Investment advice
We downgraded our company rating to neutral and lowered our target price by 19% to $8.50. The reasons are as follows:
1H23 performance fell short of our expectations: 1) The company disclosed 1H23 results, with operating income of 2,344 million yuan, -26% year-on-year; net profit of 42.2 million yuan, +216% of the same period; net profit after deducting non-return net profit of 17.22 million yuan, +6% year-on-year. 2) Corresponding to 2Q23, operating income of 1,161 million yuan, -26% of the same period; net profit of 2.05 million yuan from previous year, turning a loss into a profit; net profit of 23.47 million yuan after deducting non-return net profit of 23.47 million yuan, -33% year-on-year. 3) The company's performance fell short of our expectations, mainly because revenue continued to decline year on year, and there was no improvement trend. Due to the reduction in the scale of revenue, the company's various expense ratios have increased markedly.
The cost rate for the 1H23 period reached 34%, +6.4ppt over the previous year. Therefore, although the company's gross margin was +8.7 ppt year-on-year under the positive influence of reduced prices of raw materials, shipping costs, and increased internal quality and efficiency, the overall net profit margin was only 1.8%, which is still significantly lower than normal.
The massage chair business has strong optional attributes, and demand recovery is weak. 1) Because massage chair products have high customer value and strong optional attributes, they are greatly affected by the economic cycle, making it difficult for demand to cross the cycle. In 2022, under the pressure of the pandemic and the global economic downturn, the company's health massage revenue was -19% year-on-year, and the previous growth trend was interrupted. 2) The domestic/foreign share of the 1H23 company's revenue side was 35%/65% respectively. Although domestic sales revenue in the first half of the year was +15.5% year-on-year, and there was a restorative increase under a low base, export revenue was -38% year-on-year, and the decline increased markedly, resulting in weak performance on the revenue side. 3) Looking ahead to the second half of the year, we expect the company's domestic revenue to continue the recovery trend, but considering that demand from Europe and the US has not improved significantly, and inventory removal of superimposed massage chairs continues, we expect export revenue to remain under pressure in the second half of the year.
The new business development has not shown significant results. 1) In 2020, stimulated by the global epidemic, overseas demand for epidemic prevention supplies surged, and the company's health environment and household medical product revenue ushered in rapid growth. However, as the impact of the pandemic waned, related business revenue declined markedly. In 2022, the company's health and environment revenue was -20% year-on-year, and other main business revenue was -48% year-on-year. 2) 1H23. The company's health environment and other main revenue were -43% and -8%, respectively, with no improvement over the same period.
What is our biggest difference from the market? Although the company's export revenue base was low in the second half of the year, we still believe that the inflection point of the company's export revenue has not yet been reached, and there is still pressure in the second half of the year.
Potential catalyst: Revenue continues to decline.
Profit forecasting and valuation
We downgraded the company's rating to neutral. Due to weak performance on the revenue side of the company, we lowered our 2023/2024 net profit forecast by 46.8%/30.5% to 212 million yuan/310 million yuan. The company's current stock price corresponds to 23x/16x 2023/2024e P/E. Due to lower profit forecasts, but the recent increase in the valuation center of the export industry chain, we lowered the company's target price by 19% to 8.50 yuan, corresponding to 25x/17x 2023/2024 EP/E, with room for an increase of 8%.
risks
Demand in the massage industry exceeded expectations; the company's profitability recovery exceeded expectations.