2023 Results Exceed Our Expectations

The company announced 2023 results: revenue of 1,422 million yuan, +5.2% year on year; net profit to mother of 129 million yuan, +17.8% year over year. Credit impairment recovered in 4Q23, and the results exceeded our expectations.

On a quarterly basis, 1-4Q23 achieved revenue of 2.53/3.40/3.25/505 million yuan, respectively, of -8.8%/-0.8%/+4.8%/+19.6%; net profit to mother of 0.14/0.29/0.14/0.72 billion yuan, respectively, +8.9%/-14.3%/-17.9%/+56.9%, respectively.

Development trends

4Q23 revenue continued to accelerate, and export sales and fitness services performed well. The company's revenue in 2023 increased 5.2% year on year, and revenue in the fourth quarter continued to accelerate to 19.6% year over year. By product, indoor fitness equipment, outdoor fitness equipment and display stands achieved revenue of 891/2.19/ 270 million yuan respectively, +8.8%/+8.7%/-11.2%, respectively. We believe that it is mainly due to the company's continuous channel development and service development. The company's export sales in 2023 increased 65.6% year on year to 189 million yuan, revenue from fitness services and fitness training, etc. The year-on-year increase was 452%.

Changes in the business structure have led to a decline in gross profit. The company's gross margin in 2023 was -0.2ppt to 29.6%, of which 4Q23 gross margin was -2.0ppt to 30.5% year over year. We believe this is mainly due to changes in business structure. On the one hand, the share of export sales with low gross margin increased, and on the other hand, changes in domestic sales product structure. In terms of expenses, the company's expense ratio for the 2023 period was +0.4ppt. Among them, sales, management, finance, and R&D expenses rates were +1.4/-0.6/-0.1/-0.3ppt to 9.9%/6.6%/0.1%/2.0%, respectively. The company's net profit margin for 2023 was 1.0ppt to 9.1% year-on-year.

Follow the progress of Shuhua's new fitness model. The company actively promotes the upgrading and transformation of terminal retail stores, creates a new 1+1+1 model of Shuhua Fitness, and establishes a new system of “scientific fitness+equipment sales+door-to-door service”. The company plans to open thousands of new-model stores in the future to provide consumers with full-scene efficient fitness services. In February of this year, Shuhua's new fitness model was officially unveiled at the IWF Shanghai International Fitness Exhibition. We believe that the current customer flow sources in the industry are more diversified and decentralized. How to seize diverse customer flows is one of the key points to improve store efficiency and reduce costs and increase efficiency. The company's new model is expected to obtain all-round fitness traffic, and it is recommended to actively pay attention to the progress of the new model and store efficiency.

Profit forecasting and valuation

Considering the recovery in capacity utilization and the increase in export profitability in 2024, we raised our net profit to the mother by 8% to 144 million yuan in 2024. With the first introduction of profit forecasting for 2025, we expect the company to achieve revenue/net profit of RMB 1,828/165 million yuan respectively in 2025, an increase of 11.9%/14.7% year-on-year, respectively. Current stock prices correspond to 2024/2025, 24/21 price-earnings ratios, respectively. Maintaining an industry rating and a target price of 13.00 yuan, corresponding to a price-earnings ratio of 37/32 times in 2024/2025, respectively, there is 53% upside compared to the current stock price.

risks

Industry competition intensified; new models fell short of expectations; raw material prices fluctuated greatly.