2023&1Q24 results fall short of our expectations

The company announced results: 1) In 2023, it achieved revenue of 5,030 billion yuan, -16.5%; net profit to mother was 103 million yuan, +1.2% year over year; net profit after deducting net income of 30.77 million yuan, -78% year over year. It is proposed to pay a cash dividend of 3 yuan for every 10 shares, for a total cash dividend of 187 million yuan, corresponding to a cash dividend rate of 181%.

2) Corresponding 4Q23 revenue of 1,279 billion yuan, -3.7% YoY; net profit to mother of 8.1 million yuan, -76% YoY; net profit of 9.63 million yuan after deduction, -140% YoY. 3) 1Q24 revenue was 1,051 billion yuan, -11%; net profit to mother was 5 million yuan, -74% year over year; net profit after deduction was 9.96 million yuan, increasing year-on-year losses. The company's 2023&1Q24 performance fell short of our expectations because the recovery in demand for overseas massage products fell short of our expectations.

Massage products have strong optional attributes, and demand recovery is slow: 1) Due to the high customer order value and strong optional attributes of massage chair products, they are greatly affected by the economic cycle. The company's health and massage revenue in 2022/2023 declined -19%/-17% year over year, falling for two consecutive years. Among them, massage chair revenue fell 13% in 2023, and the performance was better than that of small massage appliances. 2) The domestic and foreign share of the company's revenue side in 2023 was 30%/67%, respectively. Although domestic sales revenue for the whole year was +20% year-on-year, recovering from a low base, it fell 11% from domestic sales revenue in 2021; export revenue in 2023 was -27% year-on-year, leading to a weak overall revenue side of the company. 1H23/2H23 export revenue was -38%/-14% year-on-year, while 2H23's decline narrowed as overseas inventories continued to be removed. 3) In 2023, the company's own-brand business revenue accounted for 51.46% of total revenue, an increase of 4ppt over the previous year.

Financial analysis: 1) Gross margin in 2023 was +4.8ppt to 37.1% year-on-year, mainly benefiting from the devaluation of RMB, lower shipping costs and raw material prices, while the company continued to reduce costs and increase efficiency. 1Q24 gross margin was -1.2ppt year on year. We estimate this is related to the year-on-year increase in the share of foundry revenue. 2) Under the influence of the decline in revenue, the expense ratio for the 2023/1Q24 period was +5.4/+0.9ppt year-on-year. The 2023/1Q24 hedging brought about fair value changes and investment income totaling 4563/11.05 million yuan, increasing profits. In addition, 4Q23 calculated that European brand Medisana lost 55.2 million yuan in goodwill. 3) Under the combined influence, 2023/1Q24 net interest rate to mother was 2.1%/0.5%, and profitability was poor. However, high dividends continued, with a cash dividend rate of 181% in 2023.

Development trends

According to data from the General Administration of Customs, due to inventory removal in the European and American markets and weak overseas demand, the export value of the Chinese massage equipment industry (in US dollars) was -21%/-9% YoY in 2022/2023, but 4Q23/1Q24 was +5%, which has been repaired. We expect the company's export OEM business to improve this year.

Profit forecasting and valuation

Due to the slow recovery of the company's revenue and poor profitability, we cut our 2024/25 net profit by 48%/46% to $138/183 million. The current stock price corresponds to 2024/25 32x/24x price-earnings ratio. Maintaining a neutral rating while considering profit forecast adjustments and the company's continued high dividend rate to drive valuation increases, we lowered our target price by 18% to 6.66 yuan, corresponding to the 2024/25 30x/23x price-earnings ratio, which has 5% downside compared to the current stock price.

risks

The risk of market demand fluctuations; the risk of global economic fluctuations; the risk of increased market competition.