Key points of investment:

24Q1 results exceeded expectations. The company achieved operating income of 6.104 billion yuan in 2023, -7.91% YoY, and realized net profit attributable to shareholders of listed companies of 568 million yuan, and realized net profit of 605 million yuan, or -4.80% YoY; of these, Q4 achieved operating income of 1,691 billion yuan in a single quarter, +8.98% YoY, and realized net profit of 190 million yuan, +66.09% YoY. 24Q1 achieved operating income of 1,980 billion yuan, +23.53% year over year, achieved net profit of 166 million yuan, +34.69% year over year, and achieved net profit of 188 million yuan after deduction, or +50.20% year over year. The performance exceeded our previous expectations.

Deeply involved in the main water heater business, and accelerate the expansion of the air energy+kitchen appliance business. According to data from Aowei Cloud Network, retail sales of major domestic kitchen and bathroom appliances in 2023 were 167 billion yuan, +5.3% year over year. Retail sales of newly-needed categories such as stoves and water heaters were 99.8 billion yuan, +6.5% year over year; retail sales of required categories including dishwashers, water purifiers, and sterilizers were 42.3 billion yuan, +8.6% year over year, of which retail sales volume increased to 41.3%. Increase and promote Structural upgrades. At the company level, it continues to be deeply involved in the gas appliance industry. In terms of heating product innovation, the company released a first-class energy-saving waterfall bath ink series for the whole house bathing scenario to meet the needs of users to bathe with water at the same time; in terms of smoke stove product innovation, the company focuses on double suction hood products, which combine the advantages of top suction and side suction range hoods with the essence to greatly avoid smoke escape; in terms of air energy product innovation, the Wanhe Xuanwu series, which uses variable frequency two-stage enthalpy compression technology and severe cold environment of -35℃ Next, it can also heat up reliably. In addition, the company also launched the original integrated cooking center product with zero steam discharge, which redefined the next generation of integrated cooking centers with its unique design and excellent performance; at the same time, it also launched the Kunpeng series dishwasher, equipped with multiple technologies to achieve the full range of standard four-star sterilization for mother and child.

Profitability continues to improve. In 2023, the company achieved a gross sales margin of 31.64%, +4.57pcts year over year, and 24Q1 gross margin +2.05pcts to 32.07% year over year. It is expected to be mainly affected by factors such as a decrease in the share of export business with low gross margin and raw material cost dividends. In terms of period expenses, the 23-year sales/management/finance expense ratio was +2.41/+0.54/+1.31pcts to 12.45%/3.29%/-0.29% year-on-year, and the R&D expenses rate remained the same year-on-year. In addition, in 2023, income from changes in fair value from other illiquid financial assets and transactional financial assets and liabilities, including investments in the Qianhai Mu Fund held by the company, was about -70 million yuan, and bad debt provision was 0.3 million yuan. In the end, the company recorded a net interest rate of 9.31% for 23 years, +1.02pcts year on year, and +0.70pcts to 8.39% year on year for 24Q1. Overall profitability continued to improve.

Downgraded to “Overweight” investment rating. Considering that there is still some uncertainty about the company's export business, we lowered our 24-25 profit forecast (previous value was 895/999 million yuan) and added a 26-year profit forecast. We expect to achieve net profit of 6.28/6.88/751 million yuan, respectively, +10.5%/+9.6%/+9.1% year-on-year, corresponding to the current price-earnings ratio of 13/12/11 times, respectively, and downgraded to the “gain” rating. In the same period, the company announced its 23-year profit distribution plan. It plans to distribute a cash dividend of 4 yuan (tax included) to all shareholders for every 10 shares, corresponding to the current dividend rate of about 3.6%, highlighting the shareholder return value.

Risk warning: risk of fluctuations in raw material prices; risk of exchange rate fluctuations.