2023/1Q24 results fall short of our expectations
The company announced its 2023 and 1Q24 results: revenue of $3.153 billion in 2023, -4.6% YoY; net profit to mother of $109 million, or -42.9% YoY. Corresponding to 4Q23, revenue was 882 million yuan, -12.2% YoY; net profit to mother was 8.87 million yuan, -90.4% YoY. 1Q24 revenue was 716 million yuan, +7.7% year on year, and net profit to mother was 23.35 million yuan, +0.5% year over year. The company's 2023/1Q24 performance fell short of our expectations, mainly due to the poor prosperity of the small household appliances industry in 2023 and the increase in the company's marketing investment, but the results have not yet been reflected.
Domestic sales revenue was clearly under pressure in 2023. 1) In 2023, the company's domestic sales revenue was -10%. By category, household lifestyle/water health/personal health/lifestyle and sanitary ware revenue in 2023 was -10%/+10%/-1%/-96%. 2) The home and lifestyle category was affected by the sharp decline in orders from Xiaomi, but the Delmar brand floor scrubbers performed well. According to AVC data, online retail sales of Delmar floor scrubbers in 2023 were +142%; the water health category performed well, especially the Philips water purification business actively exploited overseas markets, and the company's export revenue was +30% compared to the same period in 2023; the personal care and health category was affected by the competition from Bei Easy to invest heavily in the Douyin channel; the sharp year-on-year decline in the lifestyle and bathroom category was due to the company abandoning non-core businesses such as the Vantage brand lifestyle and sanitary ware.
High marketing expenses drag down profits. 1) In 2023/1Q24, the company's gross margin was +1.3/1.4ppt to 30.8%/30.9%, respectively, mainly due to the increase in the share of overseas channels with high gross profit, while the company promoted cost reduction and efficiency. 2) Since 2023, competition in the small home appliance market has intensified, and the overall drainage costs of online platforms have increased. In this context, the company has adopted aggressive marketing efforts, especially during the promotion period, which has led to a marked increase in sales expenses. 2023/4Q23/1Q24 The company's sales expense ratio was +3.8/+6.5/+2.5ppt to 19.3%/20.4%/18.9% year-on-year. At the same time, the company increased R&D investment, and the R&D cost ratio was +1.1/+0.7ppt year-on-year in 2023/1Q24. 3) Under the combined influence, the company's net profit margin was -2.3/-8.2/-0.2ppt to 3.4%/1.0%/3.3% year-on-year in 2023/4Q23/1Q24.
Development trends
In 2023, China's small home appliance market (excluding cleaning appliances) was affected by a decline in demand for optional products, which was significantly lower than expected. Beginning in the second half of 2023, the industry generally faced the challenge of declining ROI of marketing expenses, and the company's performance in 4Q23 was greatly adversely affected. 1Q24 The company began to control expenses and balance revenue and profit. We think this may be the company's main business strategy in 2024.
Profit forecasting and valuation
Due to the impact of the company's high cost investment on profitability, we lowered 2024 net profit by 27% to 165 million yuan, and introduced a net profit forecast of 203 million yuan for 2025. The current stock price corresponds to 31.5 times/25.5 times the 2024/2025 price-earnings ratio. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and recent increases in the valuation center of the home appliance sector, we lowered our target price by 17% to 12.91 yuan, corresponding to 36.2 times/29.3 times the 2024/2025 price-earnings ratio. There is 15% room for growth compared to the current stock price.
risks
Market competition increases risk; risk of weakening market demand; risk of fluctuating raw material prices.