Investment advice

Bull Group is a leading high-quality civil electrician. It has product advantages, large distribution channel advantages, and a “safe use of electricity” brand image in the Chinese electrical connectors, wall switches, and lighting markets. We believe that the driving force for the future development of the company is the expansion of new categories and global expansion.

rationales

Establishing a moat for the safe use of electricity: 1) In 2020-2023, the company's revenue and net profit CAGR were 16.0%/18.4%, respectively, and business performance continued to grow steadily. 2) In 1995, Bull Group was established to launch converter products and positioned as a “socket that works well”. In 2001, it had the highest market share in the country. Bull's safe electricity brand image is deeply rooted in the hearts of the people, and it is more difficult for consumers to change their brand preferences. 3) In 2007, the company launched wall opening products and entered the LED lighting field in 2014. In the past three years, the company's growth contribution mainly came from the above two types of businesses. The total revenue CAGR for 2020-2023 was 24.9%, and the revenue share increased from 40% to 50%. 4) The company focuses on manufacturing capacity and supply chain construction, so that Bull brand products have higher quality. For example, the company's converters with USB ports are of excellent quality, and wall switches are ahead of foreign brands in terms of artistic design and application of new materials.

Advantages of large distribution channels deep into the sinking market: 1) Due to the “low price and low frequency” characteristics of civilian electrical products, the main sales channel is a large distribution channel rather than a specialty store system. The company drew on channel management experience in the FMCG industry to create a “distribution and marketing” channel management model, which covered more than 0.75 million distribution outlets by the end of 2023. 2) The company implemented a unique promotion method of free signage in large distribution channels, which is an important innovation with a high ROI return on the company's marketing expenses. 3) Due to the strong profitability of selling Bull brand products, the channel is also more accepting of Bull brand products. We estimate that the price increase rate for the Bull brand converter channel is more than 1 times, and the price increase rate for the wall channel is more than 60%.

Category expansion and globalization jointly drive future growth: 1) In 2015, the company developed the digital accessories business, but the market for strong and weak current products is very different, and the company does not have a clear advantage. We believe that the driving force for the company's future development is the expansion of new categories, such as charging guns, charging piles, household energy storage, smart door locks, etc. In 2021, the company entered the field of new energy charging guns and charging piles. The brand image of safe use of electricity enabled the company to achieve a rapid breakthrough in the third-party charging gun market. By the end of 2023, it had covered 0.017 million C-end outlets such as auto trade stores and car beauty and decoration stores. 2) Globalization is a common development trend in China's consumer and manufacturing industries. Since 2023, the company has developed an offline dealer system in Southeast Asia, promoted distribution and marketing models; developed new energy businesses in the European and American markets, including household storage, industrial and commercial energy storage, charging guns/piles, etc., while exploring offline energy storage distribution channels, online cross-border e-commerce, and independent stations.

Profit forecasting and valuation

The profit forecast for 2024/2025 remains unchanged. The current stock price corresponds to 21.6x/18.8x 2024/2025 P/E. Maintaining an outperforming industry rating, due to the company's implementation of the Provident Fund to increase share capital, we adjusted the target price accordingly to 96.57 yuan, corresponding to 27.4x/23.9x 2024/2025 P/E, with 27% upward space.

risks

Risk of market demand fluctuations; product innovation and market expansion falling short of expectations; risk of real estate cycle fluctuations.