Incidents. SMORE International announced its 2023 annual results, achieving revenue/net profit of 11.168/1,566 billion yuan (-8.04%/-37.21%) for the full year of 2023, and revenue/net profit of 31.66/ 372 billion yuan (-3.52%/-8.43%) in 23Q4.
Localized operations combined supervision to strengthen enforcement, and the US region achieved revenue growth. The annual revenue was 11.168 billion yuan (-8.04%), and the global market share fell to 12.41% (-5.7pcts). In the second half of the year, the company's revenue was 6.046 billion yuan, -6.87% year-on-year. By customer: Year-on-year change in corporate customer/retail customer revenue for the whole year -12.
7%/+26.0% to RMB 93.21/18.47 billion, accounting for 83.5%/16.5% of revenue. Subregions: In 2023, overseas/domestic sales accounted for 98.5%/1.5%; 23H1/23H2 overseas revenue accounted for 98.79%/98.33%, respectively, and revenue increased 27.96%/0.01% year-on-year respectively. Among them, thanks to the company's active overseas policies, the product launch rate was increased through the establishment of a localized marketing team and store management system, while strengthening overseas supply chain construction (as of January 31, 2023, the company has established 5 overseas warehouses) to increase delivery speed; on the other hand, major customer VUSE The market share continues to rank first in the US (US market share was 42% in December 2023). Combined with the FDA's continued impact on non-compliant products, the US region's annual revenue increased 8.28% year over year. In the Chinese market, sales for corporate customers also fell 92.74% due to price increases for terminal products after the new regulations and consumers did not accept non-fruit flavored products (non-tobacco flavor sales accounted for more than 90% in January-September '22).
The share of disposable products has increased, and profits from multi-business layouts are temporarily under pressure. 2023 net profit of $1,566 billion (-37.21%). In 2023, the company's gross margin/net margin was 38.8%/14.03%, a year-on-year decrease of 4.5/6.5 pcts. The decline in the company's gross margin was mainly due to a decline in the share of revenue in the Chinese market with high gross margin and an increase in the share of disposable products with low gross margin. In 2023, sales/administrative expenses/R&D expenses accounted for 4.7%/7.8%/13.3% of revenue, a year-on-year change of +1.5/-1.7/+2.0pct. The increase in the sales expense ratio is mainly due to the company building a localized marketing team while strengthening overseas channel construction; the decrease in administrative expenses is mainly due to the company's strengthening of informatization construction to improve operational efficiency and the reduction in legal/information costs; the increase in R&D expenses is divided into three aspects:
1. Electronic atomization products: The ceramic atomization core technology platform FEELM TURBO was launched to improve atomization efficiency and achieve a higher number of suction ports (30% increase in the number of holes under the same liquid injection volume), bringing consumers a better experience.
At the same time, for its own brand business, COSS, an intelligent atomization system with automatic liquid injection and automatic charging functions, a separation system for heating elements and atomizer, and a vacuum-sealed oil reservoir design effectively prevented smoke oil from coming into contact with the air and further enhanced customer experience. Among them, revenue from the XROS series products under its own brand Vaporesso increased 54% year on year; 2. Heating and non-combustible products: reserve various technical routes to form differentiated product portfolios, and further reduce damage through materials and design, and equipped with intelligent sensors to meet the individual needs of customers; 3. Special atomization products: Launch of products that greatly enhance user taste and convenience; 4. Launch of the MOYAL brand, which enhances customer skin care experience with efficient media, atomization devices and penetration enhancers; 5. Atomized medical products: Focus on providing patients with integrated medical solutions for respiratory diseases, and enter the pre-clinical or registered batch production stage.
Against the backdrop of a decline in the overseas e-cigarette market, the company relied on disposable products to maintain growth. Looking at the second half of 2023, the company's revenue was 6.046 billion yuan, of which China/overseas revenue was 1.01/5.945 billion yuan, a year-on-year change of -81.58%/0.01%. Looking at overseas markets, revenue after deducting disposable products was 4,074 billion yuan, down 5.9% year on year; the company's net profit was 832 million yuan, of which after deducting disposable e-cigarettes (assuming a net interest rate of 8%) was 683 million yuan, a decrease of 0.85 pct from month to month. Due to the scale effect, the gross margin of the next product gradually increased. The gross margin in the second half of the year was 41.01%, up 1.71 pct year on year, up 4.81 pct month on month; on the other hand, the company increased R&D investment. The R&D/administrative expenses ratio in the second half of the year was 14.36%/6.64%, with a year-on-year change of +2.56pct/-1.96pct, and a month-on-month change of +2.36pct/-2.46pct.
Investment suggestions: We expect quarterly profits to gradually bottom out. As new compliant products are released and the regulatory environment becomes stricter, the month-on-month increase can be expected; Overseas: 1) Nicotine: The company is the world's largest manufacturer of electronic atomization equipment with strong product compliance capabilities. European and American governments are stepping up their crackdown on non-compliant products, and the growth rate is worth looking forward to; 2) Special atomization:
The gradual release of new products combined with rapid growth in overseas markets, and is optimistic about a steady recovery; 3) HNB: By the end of 23, the company had stored a variety of new heating technology solutions. 4) Medical treatment: The development of three drug delivery devices for asthma and chronic obstructive pulmonary disease has been completed. Currently, various pharmaceutical preparations and devices have been approved by European and American pharmaceutical institutions, and agreements have been reached with several drug regulatory agencies on the product development path, and have entered the pre-clinical or registered batch production stage.
5) Beauty: The first product has been launched, making it a beauty product that atomizes high-viscosity skincare essences with payments from the industry.
The net profit for 24-26 is estimated at 17/19/2.2 billion yuan, and the corresponding valuation is 24X/21X/18X, maintaining the “recommended” rating.
Risk warning: Technology and product iterations have fallen short of expectations, and regulations and national standards have been tightened.