Bull Group: From a converter leader to an international civil electrician leader in 2010-2023, Bull Group's revenue increased from 1.1 billion to 15.7 billion, with a compound growth rate of nearly 23%. It is a growth driven by the company's continuous expansion of categories and channel boundaries. The revenue share of core categories of converters and wall switches has dropped below 75%, and the share of revenue from new categories has increased to 25% to 30%. With R&D, channels, and manufacturing advantages, the company continues to expand from fields such as “electric connections” and “electric products for the whole house”, from opening walls and headlights to the field of smart homes for the whole house; from household electricity consumption scenarios to new energy products such as new energy vehicles and energy storage. Furthermore, the company has begun an internationalization process. Among them, Southeast Asia uses core categories to replicate the domestic and offline “distribution and marketing” channel model for localized development, and the European and American markets use new energy products as entry points.

R&D drives supply innovation and stands out with strong product strength

The advantage of the company's products is to solve the core pain points of accurate consumers. In recent years, R&D has also enhanced the competitiveness of products in terms of decorative/intelligence. For example, rail sockets, butterfly switches, etc. introduced in recent years have all become popular products. Among them, the total GMV of the 2023 rail socket on Tmall and JD platforms was about 0.24 billion yuan. Accurate market positioning on the product side is a reflection of long-term accumulated R&D strength. The company attaches importance to R&D, with forward-looking R&D in the “Future R&D Institute” and sales-oriented R&D in various product divisions. The R&D cost rate has remained around 4% since 2017, and is at the leading level in the industry. The success of the new category also continues the concept of putting R&D and products first. The company's new categories, such as charging piles and headlights, all first use product advantages to win in the industry.

Channel barriers are deep, scenarios are extended, and integration drives new categories

Channel barriers are reflected in coverage density and channel profitability. 1) In terms of channel density, the company has more than 1.1 million terminal outlets, in addition to e-commerce and B-side channels; 2) In terms of channel profits, the flat structure allows dealers and terminals to earn about 1 times the price increase space in total, and has sales rebates, advertising, and after-sales support. Channel side advantages enable new categories to achieve rapid channel penetration, hardware channels expand categories such as circuit breakers and light sources, and decorative channels expand LED lighting, smart locks, and household appliances.

Category expansion and channel upgrades complement each other. Starting this year, the opening of 4.0 flagship stores (all categories of specialty stores) will be accelerated. It is expected that 2000-3000 stores will be upgraded this year. Judging from the pilot situation, store efficiency will increase by 36% after the store upgrade, with the bull category increasing or doubling.

Lean manufacturing strengthens cost control and establishes a profit advantage for bulls

Manufacturing advantage is the foundation for companies and channels to form high profits, and is a core competitiveness that cannot be ignored. The company's net interest rate remained at the level of 22% ~ 23% in 2019-2022, and increased to 24.6% in 2023. The profitability was significantly superior to that of peers. Excellent profitability comes from: 1) Self-production throughout the supply chain: The company has a full supply chain from parts to product manufacturing, and the core categories are almost 100% homemade. For example, products such as converters/wall openers are all self-made from power cables, molds, hardware, injection molding, etc.; 2) continuous lean transformation. The company's labor efficiency is at a high level. It was 1.14 million yuan in 2023, an increase of 58% over 2019. The core of collaboration between new categories and original categories in manufacturing comes from manufacturing concepts, product customization, and core spare parts customization to consolidate the quality and cost advantages of products. The company manufactures all categories of products. Only some new products and accessories use the OEM model. The new categories of circuit breakers, lighting, household appliances, and new energy products all have factories, and will continue to promote self-development and manufacture of new categories of core components.

Profit forecasting and valuation

We expect the company's 2024-2026 revenue to be 17.8/20.3/23.4 billion yuan, profit 4.46/5.13/5.9 billion yuan, corresponding PE is 20/17/15x, and the 2023 dividend rate is 71.4%. Based on this, we estimate the 2024 dividend rate of 3.6%.

Risk warning

1. Real estate sales and completion fell short of expectations; 2. Prices of raw materials rose sharply; 3. New business development fell far short of expectations.