Investment advice: Considering the impact of short-term market competition and cost investment on performance, we lowered the 2024-2026 company's net profit forecast to be 19.4/22.8/26.01 billion yuan (4.34 billion yuan before the 24-year adjustment), and the latest closing price corresponds to PE 19/16/14 times, respectively, maintaining the “gain” rating.
The manufacturing business has been steadily restored, and private brand APV products continue to grow at a high rate. 1) H2 revenue in the US region was 2.02 billion yuan, or -6.3%, which was basically flat from month to month. Sales of exchangeable products are still being disrupted by non-compliant products for the time being. CBD product channels have sunk, the matrix has improved, and positive growth has returned to H2.
2) European H2 revenue was 2.72 billion, -6.3% YoY and +15.8% YoY. Among them, one-time H2 revenue was 1.87 billion, +16.1% year over month, and +24.6% month-on-month. Feelm Max, an upgraded ceramic core product, was launched in '23 and entered the supply chain for core customers and large-scale shipments. 3) Domestic sales H2 revenue was 100 million, -81.6% year-on-year, and +62.5% month-on-month. As the impact of non-compliant products subsided and the competitive landscape was optimized, revenue recovered in an orderly manner. 4) H2's APV product revenue for retail customers was $1.20 billion, +32.4% year over month, and +84.7% month-on-month. The main benefit was increased market development on the channel side, completed local team building, and consumer insight enabled new product promotion.
Cost reduction and efficiency have been deepened, and marginal profit margins have improved. H2 net profit margin was 15.3%, +1.3 pct month-on-month, with gross profit margin and management expense ratio of +4.8pct and -2.5pct month-on-month. It is expected to benefit the disposable electronic atomization product platform to open up the entire production and sales process, reduce development costs, and upgrade automated production lines.
The H2 sales expense ratio and R&D expense ratio were +1.2% and +2.4% month-on-month, mainly due to the increase in product marketing efforts and the pace of new product development. H2's R&D expenses rate reached 14.4%.
An improvement in the market pattern can be expected, and the company may fully benefit. 1) On the domestic sales side, the State Tobacco Monopoly Administration announced on March 18 that a special inspection to regulate the order of the e-cigarette market will be carried out on April 1. It is expected that non-compliant products will be ordered and the concentration of concentration on compliant brands will be promoted. 2) On the export side, the US FDA's crackdown on illegal products continues to intensify. The UK banned the sale of disposable e-cigarettes in April '25, which is conducive to a shift in the market pattern to strong brands and leading players who focus on compliance. The company's manufacturing, R&D, and compliance capabilities are industry-leading, or fully benefit from a new round of industry reshuffle.
Risk warning: Downstream demand recovery falls short of expectations; product marketing falls short of expectations.