FY23's profitability improved significantly, and net profit exceeded expectations

In an environment where overseas sales remained strong and costs and shipping costs declined in FY23, Vesync's profitability improved significantly: it achieved revenue of 590 million yuan (US dollars, same below), up 19.4% year over year; gross margin increased by 17.9 percentage points to 46.9%; net profit of 77 million yuan, higher than previously anticipated, and FY22 lost 16 million in net profit. In the second half of 2023, the company's gross margin increased 3.2 percentage points to 48.4% month-on-month due to improved product portfolio and reduced costs; in the second half of the year, operating expense control benefits, sales/administrative expenses fell 27.0% to 23.7% in the first half of the year, operating efficiency improved in the second half of the year, and operating net profit margin increased 5.2 percentage points month-on-month. The net operating cash flow for the year was close to 110 million yuan, and the capital turnover ratio was good. The company paid a year-end dividend of HK15.69 cents, with a dividend payout ratio of 40% for the whole year.

Continue to expand non-Amazon channels

Non-Amazon channel revenue increased 61.2% year over year in 2023. The company's products in North America have entered more than 11,000 mainstream retailer stores, while Walmart's revenue growth rate is over 150%; in Europe, products are already being sold in more than 20 countries, with a total offline store network of about 3,200, and the number of stores has increased 300% year over year; products from companies in the Asia-Pacific region have also entered more than 1,900 stores in Singapore, Malaysia, Japan, and Thailand. Sales in North America and Europe increased 17.4%/16.5% year-on-year respectively in 2023; the sales base in the Asia-Pacific region is still small, with sales revenue of about 30 million in 2023, mainly driven by Japan, and management is still optimistic about Japan's future sales potential.

The leading position of segmented products in Europe and the US is stable

Despite the air fryer recall in 2022, Cosori air fryers still have the top market share in Spain and Norway, and the top three in Hungary and Sweden. Meanwhile, the market share of Levoit air purifiers in the US continued to rise to 28.6%, up 5.6 percentage points from 2022. Thanks to in-depth insight into the rise in pet households during the pandemic, the demand for air purifiers has increased.

The content marketing side will gain strength in 2024

After popular products have established a market position, entered a period of steady renewal and iteration, and online/offline sales channels have taken shape, in 2024, the company will focus on promotion on content marketing platforms such as TikTok, YouTube, Instagram, etc. GMV on TikTok has risen rapidly since the fourth quarter of last year. Management believes that retail products can quickly and effectively reach target customers through video promotion and fan interaction, and drive omnichannel product sales. We expect FY24E's revenue/net profit to increase by 20.2%/25.1% year-on-year to 70 million/97 million yuan, respectively. The target price was raised to HK$6.66, corresponding to 10 times the FY24E price-earnings ratio, maintaining the buy rating.