Key points of investment

Songlin Technology is the leading supplier of bathroom accessories, accounting for more than 65% of exports. In the short term, it benefits from export inventory and resonance in overseas real estate chains. In the medium to long term, the company pioneered the IDM model, built multiple advantages in products, R&D, manufacturing, and major customers, and continued to promote the expansion of new kitchen and health products and market share, and support the expansion of high-margin new products such as beauty and health.

Leading foundry manufacturer of bathroom accessories, expanding smart health and a new start

Songlin Technology is a leading manufacturer and exporter of bathroom accessories. It was founded in Xiamen in 2004, pioneering the IDM OEM model. Kitchen and bathroom health contributed more than 80% of revenue, beauty and health were the second growth curve, and Songlin Home's business, which divested losses in September 2023, focuses on smart health. Operating income in 2022 was 3.18 billion yuan, a compound growth rate of 13% in 17-22, net profit of 261 million yuan in 2022, a compound growth rate of 11% in 17-22, +3% year-on-year revenue in 23Q3, and net profit to mother +152% year-on-year. Mainly due to the divestment of the loss-making Song Lin family business, brought tax deductions and investment income.

Industry Overview: Sanitary ware exports are picking up soon, smart health is taking advantage of the trend Sanitary ware accessories industry: Export stocks are about to be replenished, benefiting from overseas real estate chain restoration. 1) Market demand: At present, US household inventories have recovered to the historical median value, and terminal demand has picked up. Among them, exports in the sanitary ware category have improved month-on-month, and the inflection point of orders is imminent. We expect the industry's active inventory removal phase to end. Based on the transmission logic of optimizing the interest rate environment — existing home sales bottoming out — improving terminal demand, we are optimistic that demand in the sanitary ware industry will pick up after the Federal Reserve's interest rate cut is implemented. 2) Competitive landscape: China's largest sanitary ware exporter, accounting for 50.2% of global exports in 2021. The cost advantage of the global supply chain is obvious. Chinese bathroom foundry is dominated by overseas customers, and the share of Songlin Technology's market has continued to increase in recent years.

Smart health: The new trend of beauty and personal care, when smart toilets accelerate. 1) The beauty and personal care circuit is booming. The global personal care appliance market has a CAGR of more than 5% in the past 5 years, and the CAGR of the Chinese market has exceeded 20% in the past 5 years. Among them, beauty devices, dental irrigators, etc. are high-brightening categories. 2) When smart toilets have low penetration and high growth, the world is accelerating. From 2022 to 2028, the global smart toilet market grew at an average annual compound annual rate of 11.4%. In 2023, online sales of all-in-one smart toilets in China were +8.3%, of which volume was +23% year-on-year, and the penetration rate is still low.

Company competitiveness: Based on IDM foundry, comprehensive barriers are built, and multi-point business companies pioneered the IDM model. Compared with ordinary ODM and OEM models, the gross profit margin and net interest rate performance are clearly superior to peers.

1) R&D side: The R&D system is independent, and the underlying technology is in control. The company has established an independent systematic R&D structure, mastered low-level electronic intelligent technology, and supported product upgrades and intelligent new product expansion. Since 2018, the company's overall R&D cost rate is basically around 6%, higher than peers, and the beauty and health R&D cost rate exceeds 10%; 2) Manufacturing side: lower-level manufacturing platform, overseas production capacity layout. In order to meet the needs of flexible production with multiple SKUs, multiple batches, and small quantities, the company has raised the level of production automation, and also built multiple shared underlying manufacturing platforms for mold manufacturing, plastic processing, hardware processing, surface treatment, etc., to support shared production lines for multiple categories of kitchen, health, and beauty. Inventory turnover days are at an excellent level in the industry. Furthermore, self-production and self-marketing guarantee low manufacturing costs. The Vietnamese factory is about to start production, which is expected to achieve tax avoidance and cost reduction;

3) Sales side: Head brand binding, years of R&D cooperation. We have cooperated with international sanitary ware brands such as Moen, Kohler, and TOTO for many years. Customers have a synergetic effect in purchasing various products, and at the same time strengthen customer R&D and promotion cooperation through the IDM model to achieve strong binding;

4) Product side: Based on R&D, manufacturing, and sales advantages, the company expanded new business from bathroom accessories such as showers and faucets to higher gross margins for beauty and health.

Profit forecasting and valuation

We are optimistic about the company's short-term export repair flexibility, continue to increase market share and expand high-margin new categories based on the IDM model in the medium to long term. We expect the company to achieve operating income of 30.44/36.60/4.309 billion yuan in 2023-2025, 4.3%/+20.2%/+17.8%. We expect the company to achieve net profit of 3.8/4.8/590 million yuan in 2023-2025, an increase of 45.2%/27.1%/23.1% year-on-year, corresponding to the current market capitalization PE of 19.37/15.24/12.38. The first coverage gives an “gain” rating.

Risk warning

Export demand fluctuates; the Fed's interest rate cuts fall short of expectations; demand transmission falls short of expectations; changes in raw material costs and exchange rates; fluctuations in orders from major customers; and the release of new smart health products falls short of expectations, etc.