Incident: The company released its semi-annual report for 2023H1. In 2023H1, the company achieved operating income of 872 million yuan, an increase of 32.15% over the previous year; net profit of 30,2029 million yuan, an increase of 674.72% over the previous year; net profit without attribution was 29.5458 million yuan, an increase of 785.22% over the previous year. On a quarterly basis, 2023Q2 achieved revenue of 455 million yuan, up 32.04% year on year; net profit of 24.3538 million yuan, up 1441.09% year on year; net profit after deducting non-return net profit of 237.8841 million yuan, up 1595.96% year on year.

High temperature weather combined with overseas stock replenishment helped demand for small household appliances recover, and income diversification continued to rise. The company is deeply involved in the export of small household appliances. The small household appliance business accounts for 78% of exports. Against the backdrop of a higher exchange rate between the US dollar and the RMB, the revenue side received a significant boost. In the first half of the year, the company's small household appliance export revenue increased 30.22% year-on-year to 341 million yuan. By product, it mainly benefited from the high temperature weather in many parts of the world in the first half of the year, and improved sales volume of ODM partners such as Mingchuang Premium, Huawei Mall, and Midea after domestic epidemic control was liberalized. The company's rechargeable AC and DC fans achieved revenue of 215 million yuan, an increase of 49.7% over the previous year; rechargeable lighting equipment achieved revenue of 152 million yuan, an increase of 0.94% over the previous year. The company actively deployed health lighting and educational lighting product upgrades to promote product structure optimization; Health appliances achieved revenue of 63 million yuan, an increase of 22.69% over the previous year. It is expected to successfully enter the Huawei Mall system and expand new categories such as personal care, beauty, and pet appliances to enrich revenue sources.

The gross margin of small household appliances has improved drastically, and a low base has driven a high increase in performance. In the first half of the year, engineering construction business revenue increased 33.60% year on year to 416 million yuan, gross margin fell 3.02 pct year on year to 11.61%, and engineering construction support for the company's performance may gradually weaken. Benefiting from significant improvements in demand, continuous optimization of structure, and falling raw material prices, the gross margin of 2023H1's small home appliance business increased by 8.09 pct to 17.72% year on year. Among them, the gross margin of rechargeable backup lighting and rechargeable AC and DC fans was 17.38%/21.02%, respectively, an increase of 8.4/10.43 pct over the previous year. The 2023H1 sales/management/finance rate was 1.53%/4.75%/0.4%, with year-on-year changes of +0.69/+0.69/-2.31pct, respectively. Financial expenses for the first half of the year decreased by 80.60% year-on-year. This was mainly due to the merger of financial revenue from the PPP project implementation company for the Changjinghuang High Speed Rail supporting ancillary facilities in Poyang County, and exchange income generated by fluctuations in the US dollar exchange rate in the first half of the year.

Single-use vaping e-cigarettes began to be released, and the layout of the entire industry chain created a new growth curve. The company has obtained a tobacco monopoly manufacturer license (e-cigarette processing enterprise), and has established the entire e-cigarette business chain layout in terms of nicotine used in e-cigarettes, atomization, production/processing, and brand ownership. With rich experience and perfect layout on the manufacturing side, the company has successfully created disposable vaping e-cigarette products with novel design, unique taste and excellent quality, which are well recognized and loved by foreign consumers. With the “Belt and Road” rich channel advantages, the company's own brand “SONG” was rapidly released, and the e-cigarette business achieved revenue of 17 million yuan in the first half of the year. It's only been a few months since the company's e-cigarette business was officially launched and production is scheduled. Production capacity is in a period of rapid rise, and there are plenty of orders on hand, and future revenue contributions are worth looking forward to.

Investment suggestions: The company is deeply involved in the export of small household appliances and actively promotes product upgrades and category expansion. Against the backdrop of exchange rate fluctuations and demand recovery, the good trend of revenue improvement is expected to continue. Currently, the company's e-cigarette business is using the layout of the entire industry chain and the rich channel advantages of the Belt and Road to accelerate growth, and the boosting effect on the company's revenue is worth looking forward to. We expect the company's net profit from 2023-2025 to be 0.55/0.72 billion yuan, EPS is 0.17/0.23/0.26 yuan per share, and the corresponding PE is 62/47/40 times, maintaining the “careful recommendation” rating.

Risk warning: macroeconomic and policy risks; risk of competition in the small home appliance market; risk of exchange rate fluctuations affecting financial expenses; risk of new business development falling short of expectations.