Core views

Due to industry price competition and distributors' absorption of old product inventories, profits continued to be under pressure in 2023 and 24Q1. On the product side, the 24Q1 smart toilet revenue growth is expected to reach 20% +, and volume growth is still the main driving force; on the channel side, the 24Q1 distribution and retail channels are expected to pick up, mainly due to the increase in export orders. Home improvement, engineering and e-commerce channels are expected to continue to decline due to channel inventory. Looking ahead to 2024, the product side will continue to promote intelligent upgrades and packages to increase customer unit prices, and the channel side will step up efforts to develop declining channels. Going overseas is expected to contribute to growth, increasing the ratio of self-production and streamlining SKUs will drive up profitability.

occurrences

The company released its 2024 quarterly report: 24Q1 revenue of 1,135 million yuan/ +2.26%, net profit to mother of 0.90 million yuan (3.11 million yuan in the same period last year), net profit of non-return to mother - 111 million yuan (same period last year - 15.536 million yuan); net cash flow from operating activities - 939 million yuan/ -61.7%, EPS (basic) of -0.09 yuan/share, ROE weighted at -1.82%/-1.89pct.

The company released its 2023 annual report: 2023 revenue of 7.648 billion yuan/ +1.79%, net profit of 425 million yuan/ -28.4%, net profit of 392 million yuan/ -27.6%; net cash flow from operating activities of 1,166 million yuan/ +190.98%, EPS (basic) of 0.44 yuan/share, +4.3% year-on-year, ROE weighted 8.56%/-8.55pct. The company plans to pay a cash dividend of 1.32 yuan (tax included) for every 10 shares.

Brief review

Due to industry price competition and distributors' absorption of old product inventories, profits continued to be under pressure in 2023 and 24Q1. The company's 23Q4 and 24Q1 revenue were +5.41%, +2.26%, 23Q4 and 24Q1 net profit of 137 million yuan/ -19.6%, respectively, and losses of 90 million yuan, respectively, mainly affected by distributors' digestion of old products, and the decline in average product prices under price competition in the smart toilet industry. 24Q1 gross profit margin and net interest rate were 24.4% /-6.04pct, -8.03% /-8.28pct, still falling 25.94% and 5.79% month-on-month compared to 23Q4 export orders, which were mainly affected by export orders with low gross margins, expected It is expected to gradually recover as q2 begins to be fully upgraded.

By category, smart toilets continued to be sold, and revenue in categories such as bathroom furniture, tiles, and bathtubs all declined. In 2023, the revenue of sanitary ceramics, faucet hardware, bathroom furniture, tiles, bathtubs and bathrooms, and custom cabinets was 37.4, 21.0, 7.7, 4.3, 3.9, and 98 million yuan, respectively, +6.6%, -15.8%, -6.1%, and -6.4%, respectively.

In '23, the company's smart toilet revenue was 1.56 billion yuan/ +12.5%, corresponding to a 30% increase in volume and a decline in average price, accounting for 20.4% /+1.9pct of revenue, and a gross profit margin of 30.3% /-6.2 pct. The 24Q1 smart toilet revenue growth is expected to be high in single digits, accounting for 20% +, and volume growth is still the main driving force. In the future, along with the launch of new smart toilets with high additional functions, it is expected that the overall customer unit price will increase.

By channel, e-commerce and home improvement channels surged in 2023, and retail channels are still declining. The diversification of the company's channels continues to advance. 1) Retail channels: 2023 distribution and retail revenue of 2.95 billion yuan/ -3.5%. The company continues to push dealers to further lay out sales gaps, further improve the layout of existing terminal stores, accelerate channel decline, and expand sales coverage. At the end of 2023, there were 17,567 terminal stores (mainly home improvement stores and sinking channel outlets); 2) Engineering channel: 2023 engineering channel revenue of 1,888 billion yuan/ +1.46%, of which distribution engineering projects amounted to 1.66 billion yuan /- 2.2%, the company continues to develop education, medical institutions, enterprises, hotels and government engineering services; 3) E-commerce channels: e-commerce revenue of 1,608 million yuan/ +6.65% in 2023, including direct e-commerce 803 million yuan/ +15.3%, mainly due to increasing the layout and investment in emerging channels while actively developing new retail; 4) Home improvement channels: The revenue of the home improvement channel in 2023 was 1,143 million yuan/ +9.4%. The company actively expanded home improvement channels, reached strategic cooperation with leading national home improvement companies, and distributed distributors from all over the country Implementation on the ground. From the channel side, distribution and retail channels are expected to pick up in 24Q1, mainly due to an increase in export orders. Home improvement, engineering, and e-commerce channels are expected to continue to decline due to channel inventory.

Gross profit margins are under pressure due to increased competition, and sales expense ratios have declined due to marketing policy adjustments. In 2023, the company's gross profit margin was 28.3% /-4.5pct. The main reason was that the company increased its product promotion efforts in the face of increased competition. The gross margins of the main products in 2023 were 28.5%, 26.6%, and 26.8%, compared with -5.5 pct, -3.9 pct, and -5.4pc. On the cost side, sales, management, and R&D expenses in 2023 were 7.9%, 8.6%, and 4.5%, compared with -1.6 pct, -0.1 pct, and -0.1 pct. The decrease in sales expenses in 23 was mainly due to the company changing the subsidy fees for dealers to price discounts. The company's net operating cash flow in '23 was 1.17 billion yuan/ +191.0%, and Q4 was 690 million yuan/ +23.2%.

Looking ahead to 24 years, the product side will continue to promote intelligent upgrades and packages to increase customer unit prices, and the channel side will step up efforts to develop declining channels, and going overseas is expected to contribute to the increase. The company plans to target the performance assessment target of the equity incentive plan in '24. It is expected that revenue and net profit will grow no less than 10% or 15% in 2023. The main benefits are: 1) On the product side, on the one hand, cost-effective products maintain market share, and on the other hand, launch product structure upgrades and sales of a wide range of integrated products to increase customer order value; 2) On the channel side, the company plans to increase the development of declining channels. It is expected that direct-managed e-commerce will gradually pick up along with the introduction of new products; 3) The company will continue to increase its self-production ratio, SKU simplification and streamlining Raising the level of informatization will Drive profitability to continue to rise.

4) Accelerate overseas market expansion and is expected to provide a new incremental component.

Profit forecast: Revenue for 2024-2026 is expected to be 84.5, 91.9, and 9.90 billion yuan, respectively, up 10.5%, 8.8%, and 7.7% year-on-year. Net profit from 2024-2026 is expected to be 4.86, 5.45, and 605 million yuan, up 14.5%, 12.1%, and 11.0% year-on-year, corresponding to 2024-2026 PE being 18X, 16X, and 14X, maintaining the “buy” rating.

Risk warning:

1) Risk of increased market competition: As regulation of the real estate industry continues and environmental standards continue to become stricter, market competition will further intensify, and the industry will usher in a round of reshuffle. Among them, outstanding enterprises that focus on brand building and green and environmentally friendly manufacturing, and continue to increase investment in R&D will stand out, while enterprises that lack independent brands, poor channel construction, and weak technological innovation capabilities will face elimination. In future market competition, if the company cannot maintain its existing competitive advantage in new product development and iteration, production capacity scale, brand building, channel layout, green manufacturing, etc., it will adversely affect the company's production, sales and profit levels.

2) Risk of fluctuations in the real estate market: The company is a post-real estate industry chain company, which is closely related to data such as real estate completion and sales. Among them, the bulk business is directly affected by the commencement of construction such as hardcover housing, etc., and the retail side business is affected by new home purchases and second-hand housing transactions. If real estate sales continue to decline, it may have an impact on market demand;

3) Risk of fluctuations in raw material prices: The company's main raw materials include water parts covers, sediment, metal materials, chemical materials, wood materials, packaging materials, etc. The energy required for the production and operation process includes water, electricity, natural gas, etc. In 2022, the company's raw material costs accounted for an average share of more than 50% of the company's production costs, and energy costs such as water, electricity, and natural gas accounted for an average share of more than 5% of the company's production costs. If the prices of the company's main raw materials and energy fluctuate in the future, it will have a great impact on the company's production, operation and profit level.