Investment advice
We raised Rongtai Health's rating from neutral to outperforming the industry. The reasons are as follows:
Export: End of inventory removal cycle, restructuring of major Korean customers. 1) The company's export revenue in 2022/2023 was -19.2%/-8.6% year-on-year, and export revenue in 2023 was 1,028 billion yuan, accounting for 56% of the main business.
2) In the past two years, overseas demand declined, and customers removed inventory, leading to a decline in exports for two consecutive years.
At present, the European and American inventory removal cycle has ended. Since 3Q23, the company's exports to the US market have continued to improve.
The US market accounts for about 25% of the company's export revenue in 2023, and its profitability is strong. 3) Bodyfriend Korea is the company's largest customer, and the Korean market contributed more than 50% of export revenue in 2023.
Due to the weak economic climate in Korea, Bodyfriend adjusted its product structure; in 4Q23, Rongtai shipped a large number of new mid-range and low-end products, and South Korea's revenue achieved a high level of recovery over the same period last year.
Domestic sales: Under the trend of cost-effective consumption, the main brand positioning was adjusted smoothly. 1) In the period of consumption upgrading, the company's main brand, Rongtai, focused on high-end positioning, and the online brand Motorada focused on cost-effective positioning. With the rise of the consumer cost performance trend in the last two years, the company adjusted its brand strategy, the main brand positioning moved downward, and the size of the Morada brand shrank. 2) The company's domestic sales revenue in 2022/2023 was -27.8%/-5.2% year-on-year. Main brand sales have stabilized in 2023, and the proportion of the Morada brand is already low. In 2022/2023, domestic sales gross profit margin was 36.0%/36.6%, rising steadily. The company successfully achieved brand repositioning and adjustment. Rongtai changed from a high-end brand to a popular brand to meet consumer trends.
The cost ROI effect is good, and profitability has improved: 1) Small household appliances and small massage equipment companies will generally face a decline in cost ROI in 2023, which affects profit margins. In contrast, the company maintained a good level of ROI on expenses. In 2023, the gross margin of domestic sales increased by 0.53 ppt, and the sales expense ratio increased by 0.6 ppt, which is basically the same. 2) Exports benefited from an increase in the share of the highly profitable US market and exchange rate factors, which increased the gross margin of exports by 6.7ppt throughout the year. 3) Net profit margin increased by 2.7ppt to 10.9% in 2023. The company predicted a 58-72% year-on-year increase in net profit for 1Q24.
What is our biggest difference from the market? The market believes that as a high-priced option, the domestic and foreign sales markets of companies in 2022 and 2023 are under great pressure, and this pressure will continue in the future. Through the company's business performance, we believe that domestic sales have overcome the pressure on consumer cost performance and maintained good profitability through brand positioning adjustments; in overseas markets, the company has already gone through the most stressful stage of inventory removal.
Potential catalysts: Profitability restoration exceeded expectations; export performance exceeded expectations.
Profit forecasting and valuation
We have basically kept our 24-year profit forecast unchanged and introduced a 25-year profit forecast of 264 million yuan. Currently trading on 24/25 12.6x/11.5x P/E. The company's profit improvement trend is becoming more and more clear, and the massage equipment industry's exports are improving. Increased market attention has led to an increase in valuation. We upgraded our rating to outperform the industry and raised our target price by 10% to 26.05 yuan, corresponding to 15x/14x P/E in 24/25, with an upward space of 19%.
risks
Global market demand fluctuation risk; exchange rate fluctuation risk; raw material price fluctuation risk.