2023 results are in line with our expectations
The company announced its 2023 results. Revenue reached 11.17 billion yuan, down 8%. Among them, overseas business revenue reached 11.01 billion yuan, an increase of 11.2%; net profit reached 1.65 billion yuan, a decrease of 34.5%. The results were in line with the previous performance forecast range. On a quarterly basis, 1Q/2Q/3Q/4Q revenue was +11.9%/-23.5%/-10.3%/-3.5%, respectively, and net profit was -44.8%/-48.7%/-35.2%/+18.9%, respectively. We believe that the domestic business declined significantly in 2023, putting pressure on the company's overall revenue and profit, but the export business will continue to grow. Looking ahead to 2024, we expect that with the decline in the domestic market base, overseas APV, disposable and other products will grow rapidly, and new products such as atomized beauty will be launched, and the company's performance is expected to stabilize and improve.
Development trends
1. The domestic market is expected to improve steadily in 2024, and overseas regions such as Europe will continue to grow rapidly. By region, we expect: 1) US revenue to reach 4.46 billion yuan, an increase of 8.3%. The company cooperated steadily with major customers such as VuseAlto. Subsequent US redemption sales are expected to continue to grow, and special-use atomization products are also expected to grow rapidly with product and channel upgrades; 2) Europe and other regions: revenue of 6.55 billion yuan in 23 years, an increase of 13.2%, of which disposable product revenue reached 3.37 billion yuan, an increase of 74.5%, and APV (excluding the US) revenue reached 1.48 billion yuan, the same increase of 31.3%. One-off technology upgrades and sales of new APV products are expected to continue to increase rapidly in 2024; 3) China: Revenue reached 160 million yuan in '23, down 92.7%. Relevant revenue declined markedly in the short term after the implementation of domestic policies. With the implementation of policy boots and the strengthening of illegal product supervision, it is expected to improve steadily in the future.
2. Profitability has declined due to product restructuring, and gross margins of various categories may remain steady. In 2023, the company's gross margin reached 38.8%, a decrease of 4.5 ppt. We expect the gross margin of the remaining categories to remain steady, mainly due to an increase in the share of disposable products with lower gross profit levels; on the cost side, sales/management/R&D expense ratios were +1.5ppt, respectively. The company continued to promote cost reduction and efficiency, and the management cost rate continued to decline. The company invested about 1.48 billion yuan in R&D in 23 years, and e-cigarettes and HNB/special-use atomization/atomization account for about 69.7%/11.6%, respectively. 18.7%. High R&D investment is expected to consolidate the company's leading position and protect medium- to long-term growth.
3. Optimistic about the company's strong comprehensive competitive advantage as a global leader in atomization technology. E-cigarette and other businesses are expected to continue to grow in 2024, and the new business is expected to usher in a harvest period. We anticipate that 1) in the existing business, overseas sales of disposable and APV products are expected to continue to grow rapidly; special-purpose atomization is expected to accelerate growth as channels and product layouts improve; 2) In the new business, the company has recently launched first-generation atomized beauty product solutions, and new businesses such as HNB and atomized medicine are expected to usher in breakthroughs and diversified growth curves.
Profit forecasting and valuation
Considering that sales in the domestic market have yet to recover significantly, the 2024 net profit forecast was lowered by 32% to 1.7 billion yuan. For the first time, a net profit of 2.04 billion yuan was introduced for the first time. The current stock price corresponds to 23/18 times P/E for 24/25. Keep the outperforming industry rating and target price of HK$7.80 unchanged, corresponding to 25/21 times P/E in 24/25, with 11% upside.
risks
Policy and regulatory risks, customer dependency risks, technical risks, exchange rate fluctuations.