Core views
According to data from the General Administration of Customs, the overall exports of the domestic tool industry accelerated in May, driven by overseas inventory replenishment demand. As an export leader in the domestic tool industry, the company still handed over the best performance questionnaire in history against the backdrop of active inventory removal and declining terminal demand in overseas markets in '23. As the industry continues to warm up, Superstar Technology is expected to gradually increase its share and drive further growth in business performance through category expansion, channel expansion and global production capacity layout. The company successfully entered the supply chain of the leading retailer's 20V power tool platform, and the category expanded to the next level.
occurrences
The General Administration of Customs released export data for the tool industry. In May 2024, total exports of manual/electric/garden tools increased by 17.9%, 30.1%, and 199.6%, respectively.
On May 10, 2024, the company issued an order confirmation notice and received a purchase order from a major US retail company. The subject of the purchase was a 20V cordless lithium battery power tool series and related spare parts. The estimated amount is not less than 30 million US dollars per year.
Brief review
1. The General Administration of Customs released May export data. Demand for tools increased further. According to the May data of the General Administration of Customs, domestic exports of hand tools, power tools, and garden tools increased 17.9%, 30.1%, and 19.6%, respectively, over the same period last year, showing a high trend on the demand side. We believe that the main reason is that US retailers have restarted the inventory replenishment process after a storage cycle of more than a year, compounded by the recent Red Sea crisis and rising freight rates, which has caused downstream retailers to worry and generally raised their corresponding inventory levels.
The company's export share is relatively high, and it is expected to benefit from the downstream inventory replenishment process. According to the company announcement, superstars accounted for 94% of the overseas market in 2023. Among them, the American market accounts for 68% of the overseas market, which accounts for the largest share of the company's revenue, and the European market accounts for 27% of the overseas market. The company is an important supplier to leading retail companies in Europe and the US. Relying on years of innovation and stable relationships, its share has maintained a steady upward trend, and is expected to fully accept customer orders to achieve a bottom reversal in operating revenue. Following the implementation of the Federal Reserve's interest rate cut cycle, the boost in terminal demand is expected to drive further growth in company orders.
2. Received a 20V tool order from a major customer, and the category was extended. On May 10, the company announced that it had obtained purchase confirmation from a major US retail company. The procurement target was the 20V cordless lithium battery power tool series and related spare parts. The scope of procurement was the sales and service of all of this series of power tools and spare parts products for the next three years at thousands of stores in North America. The estimated order amount is no less than 30 million US dollars per year, exceeding 10% of the company's 2023 power tool product revenue.
In terms of pace, products will begin to be delivered to customers in the second half of 2024. Since sales will only be carried out for half a year in 2024, revenue from related products is expected to be no more than 40 million US dollars in 2024. The 20V series is the mainstream voltage platform for power tools. It is also the first time that the company has entered this product field. Receiving orders from leading retailers initially showed customer recognition for the company's technical development capabilities and supply capabilities. As a second growth curve, power tools are expected to provide a strong driver for superstars' revenue growth.
Investment advice: Due to the uncertainty of the Fed's interest rate cut, industry terminal demand will continue to fluctuate at a low level. However, along with retailers' inventory falling and downstream demand slowly recovering, tool companies' order side has taken the lead in showing an inflection point. As a leading export enterprise in the domestic tool industry, Superstar Technology Hand Tools has strong competitiveness. Power tools and tool cabinets have developed rapidly in recent years and are becoming the second growth curve driving performance growth. The company is expected to achieve operating income of 133.46/159.83/18.931 billion yuan respectively in 2024-2026, up 22.10%/19.76%/18.45% year on year; net profit to mother of 20.65/24.47/2,886 billion yuan, up 22.07%/18.52%/17.92% year on year. Corresponding PE is 14.30X/12.06X/10.23X respectively, giving a “buy” rating for the first time.
Risk warning: 1. The US macroeconomic growth rate falls short of expectations, and sales of tool products are closely related to US real estate performance. If the Fed's interest rate cuts fall short of expectations or real estate growth slows down, or have a big impact on the company's product sales; 2. Raw material prices fluctuate greatly: the company's raw material costs account for a large share of operating costs, and if bulk prices rise again, the company's profitability will weaken; 3. Overseas market risks: Uncertainty in the overseas environment has increased in recent years, and the company's export sales account for a relatively high share. If external demand falls, the performance will be impacted accordingly; 4. In a weak market environment, competition in the industry is more intense, and there is a risk that the company will lose share and lower price competition will drag down profits. 5. Sensitivity analysis: Considering adverse factors such as raw material prices and rising freight rates, the company's gross margin in 2024 was 31.2%/31.9%/32.4%, respectively, under pessimistic, neutral, and optimistic conditions, and the corresponding net profit growth rate to mother was 15.9%/20.7%/24.1%, respectively.