Incident: The company announced its 2023 annual results, achieving annual revenue of 11.168 billion yuan, -8.0% year on year; net profit of 1,645 billion yuan, or -34.5% year on year; total comprehensive comprehensive revenue of 1,566 billion yuan, or -37.2% year on year.
Overall overseas growth has been steady, and the mainland China market is dragging down revenue.
In terms of sales to corporate customers, revenue of 9.321 billion yuan was achieved in '23, or -12.7% year-on-year. (1) The US market was 4,084 billion yuan for the whole year. Under a low base (product price reduction in '22), it grew steadily (+8.2%), and 23H2 declined year-on-year (-6.3%). The company helps major customers increase their market share in bomb exchange products, but there are still a large number of non-compliant disposable products in the local market, which is detrimental to the company's customers' compliant products. (2) In Europe and other overseas regions, 5,074 billion yuan (+8.9%). In line with market trends, the company launched disposable products in '22, with sales volume reaching 3.37 billion yuan (+74.5%). 23H1/H2 sold 15.00 (+369%) /18.70 billion yuan (+16.1%) respectively; accordingly, it is estimated that sales of rebound products are under pressure. (3) Mainland China was 163 million yuan (-92.7%) for the whole year, mainly due to new policies restricting e-cigarette flavors and imposing consumption taxes at the end of '22, putting pressure on the overall market.
In terms of the independent brand business, revenue of 1,847 billion yuan was achieved in 23 years, +26.0% year on year; of these, the US market was 372 million yuan (+8.8%), and Europe and other countries were 1,475 billion yuan (+31.3%).
The outstanding performance was mainly due to the company promoting digital marketing management, building overseas local teams, and launching differentiated and innovative products one after another.
I am optimistic about the steady increase in revenue from disposable products and independent brand business support.
Looking ahead to sales to corporate customers in '24: (1) The revenue growth rate in the US market is expected to be relatively steady, with the company's major customers ranking first in market share, although sales growth is still constrained by non-compliant products. As government enforcement intensifies, future growth is expected to be boosted. Furthermore, after optimization of storage, channels, and product matrices, sales of special purpose atomization products resumed growth in 23H2, and are expected to contribute to the increase in 24 years. (2) Europe and other overseas regions are expected to achieve relatively rapid growth. The company continues to innovate disposable products to meet compliance while improving suction volume and taste, and cooperating with major customers to continuously expand the market. Faced with changes in policies banning disposable products in some countries, the company has been leading the market for a long time in bomb exchange products, and can also meet consumer demand (but we need to pay attention to the actual enforcement of non-compliant products in various countries). (3) The mainland China market currently has little impact on revenue, and it is expected that it will still need to be gradually repaired.
The independent brand business is expected to continue to achieve a relatively rapid revenue growth rate in 24 years. The company's measures to strengthen marketing and operations and enhance competitiveness have already borne fruit, and the trend of increasing market share is expected to continue. At the same time, the company has also launched a new series of products with automatic refueling and automatic charging functions and a longer lifespan.
The gross margin is affected by the product structure, and sales and R&D expenses are boosted. (1) The company achieved a gross profit margin of 38.8% in '23, -4.5 pct year on year. This is mainly due to the impact of product structure, including a decline in revenue in the mainland China market with high gross margin and a high increase in revenue from disposable products with low gross margin. (2) 23-year sales expense rate 4.7% (+1.5pct.) This is due to the company's continuous efforts to develop overseas markets and promote new products; the management cost ratio is 7.8% (-1.7pct.) It is mainly due to the improvement of the company's management efficiency and a decrease in management expenses; the R&D cost rate is 13.3% (+2.0pct.) This is mainly due to an increase in R&D investment in the field of atomization medicine.
The gross margin is expected to stabilize in the future, and the expense ratio is expected to be relatively stable. Looking ahead to 24, the company's gross margin is expected to stabilize or decline slightly. Thanks to improvements in operational efficiency and scale effects, the gross margin of disposable products increased quarterly in '23, hedging the impact of product structure on gross margin to a certain extent in the future. While the company continues to strengthen marketing and operation capabilities and increase R&D investment, management and R&D efficiency has improved. Overall, the cost rate may remain stable.
The new atomization business continues to advance, and atomization beauty solutions have been implemented. (1) In the field of atomized beauty, the company launched the MOYAL Lanzhi brand and first-generation atomized beauty product solutions in 24Q1, including skin care media, atomizing devices, and penetration promotion devices. (2) In the field of atomization medicine, the company's development of three drug delivery devices for asthma and COPD, as well as several pharmaceutical preparations, has entered registered batch production or pre-clinical stage. (3) In the field of heated non-combustible products, the company has developed a variety of competitive heating technology platforms, and will further polish the products in 24 years to lay a good foundation for commercialization.
Profit forecast and investment advice: The company's net profit for 2024-2026 is expected to be RMB 17.89, 19.65, and RMB 2,189 billion, with growth rates of 8.76%, 9.81%, and 11.41%, respectively. Currently, the corresponding PE price is 21, 19, and 17 times, respectively. The company has a strong competitive advantage in the field of R&D and manufacturing of electronic atomization products, and the scale effect and operating efficiency are constantly improving. Currently, the company is gradually releasing disposable products, growing rapidly after optimizing its own brand business. It has a comprehensive atomization product layout, strong ability to adapt to changes in overseas regulatory policies, and is expected to benefit from strengthened supervision. The company maintains R&D investment in fields such as non-combustion heating and atomization medicine, and is expected to open up a new growth curve. Maintain a “Recommended” rating.
Risk warning: Overseas non-compliant product regulation falls short of expectations, downstream demand falls short of expectations, market competition intensifies, R&D transformation and product development fall short of expectations, and the business risks of major customers