Ousheng Electric released its 2024 semi-annual report.

In 2024, H1 achieved revenue of 0.739 billion yuan, +55.16% year over year, and realized net profit to mother 0.097 billion yuan, or +46.88% year over year.

By product, wet and dry vacuum cleaners achieved revenue of 0.38 billion yuan, +38.80% year over year, gross profit margin of 38.80%, and +2.08pcts year over year. Small air compressors achieved revenue of 0.245 billion yuan, +72.40% year over year, gross profit margin of 28.57%, and +8.24% year over year. The overall gross profit margin was 36.09%, +4.20pcts year on year, and the net profit margin to mother was 13.14%, which was basically the same as the previous year.

2024 Q2: Achieved revenue of 0.413 billion yuan, +77.53% YoY and +26.72% YoY. Achieved net profit of 0.054 billion yuan, +14.99% year over year and +26.96% month over month.

Achieved a gross profit margin of 33.34%, +4.62 pcts year over month, high cost growth rate. In 2024 Q2, sales/management/R&D expenses were 0.56/0.13/0.21, respectively, the year-on-year growth rate was +104.85%/-32.68/ 42.36%, and financial expenses were -0.007 billion yuan, an increase of 0.045 billion yuan over the same period last year, mainly due to a decrease in exchange gains and losses. Overall, expenses increased 804.75% year on year during the 24Q2 period. Due to the sharp increase in expenses, net interest rate declined a lot in a single quarter. The net interest rate for 24Q2 was 13.15%, -7.15 pcts year on year, basically flat from month to month. Net interest rate without return to mother was 12.61%, or -6.00 pcts year on year, which was basically flat from month to month.

We are deeply involved in small air compressors and wet and dry vacuum cleaners, and operate for overseas retailers. At the beginning of its establishment, the company determined a business strategy with overseas retailers as the main target market, focusing on small air compressors and wet and dry vacuum cleaners. From 2009 to 2012, the company gradually expanded to receive small-scale orders from overseas retailers; in 2012-2017, the company gradually established stable business partnerships with well-known international retailers Lowe's, etc., and established a business model centered on brand licensing and ODM. Since 2018, the company has actively adjusted its product structure and gradually developed high-end. In recent years, the company's top five customers have all been internationally renowned supermarkets, such as Lowe's, Costco, Harbon Freight Tools, The Home Depot, etc.

The company is in a leading position in the segment of small air compressors and wet and dry vacuum cleaners: the downstream market for power tools is mainly concentrated in North America, Europe and other regions. The company mainly targets the North American market, and has been actively exploring non-North American markets in recent years. In terms of small air compressors, the company accounts for about 20% of sales of domestic production and export to the North American market. In terms of wet and dry vacuum cleaners, according to statistics on the export value of vacuum cleaners exported from China to the US and Canada in 2023, the company accounts for nearly 6% of sales.

The company's profitability continues to increase: For different sales channels, the company adopted three models: export model, offline model, and network model. According to the business model, the company adopted ODM, brand licensing, 0EM and 0BM models, mainly 0DM and brand licensing models. In recent years, the 0DM model's revenue share continued to rise. The 0DM model's revenue share in 2023 reached 50.9%. As far as gross margin is concerned, the brand licensing model is higher than the 0DM model, and the gross margins of the two in 2023 are respectively 43.27% and 29.76%. However, as far as net interest rates are concerned, the ODM model is generally higher than the brand licensing model because the latter requires more customs duties, freight charges, and platform transaction fees compared to the former. In recent years, due to a combination of factors such as changes in product structure, fluctuations in exchange rates, and fluctuations in raw material prices, the company's gross profit margin and net interest rate have steadily rebounded.

Company growth logic:

1) An industry in high demand?? and the company itself?? Helping the North American market grow. Since 2022, the weak demand for durable consumer goods such as appliances in the US combined with the epidemic has led to a continuous decline in sales in US electronics stores and a rapid rise in retail inventory. Since the second half of '23, the North American market tool and home appliance channels and brands have begun the inventory replenishment phase, driving the steady growth of the company's small air compressors and vacuum cleaner products. In 2024, H1, the company's revenue achieved a 55.16% increase. At the same time, although the inventory replenishment phase of brand sellers is over, compounded by the continued boom in the US economy, real estate is expected to recover stronger The company's order volume is still growing. The company announced in April that it had received a $20 million purchase commitment from Home Depot, which is expected to be converted into orders one after another and contributed to this year's revenue growth. The company has cost-effective product capabilities, continuous iterative R&D capabilities, high-quality channel resources, and integrated advantages of making key components. It is expected to benefit deeply from the boom in the industry, and the growth certainty of the North American market is relatively strong.

2) Actively explore non-North American markets and new categories, which is expected to contribute new momentum to growth. The company actively explores overseas markets outside of North America. The European market already has large-scale sales, and the potential market growth is significant. In addition, the company is also expanding its own product category. For cleaning equipment categories, the company is expanding to cleaning equipment such as floor blowers and industrial fans based on its competitive advantage in the wet and dry vacuum cleaner market; for the aerodynamic equipment category, the company relies on small air compressors to have a high market share in high-quality customers and increase the extension of pneumatic tools and pneumatic accessories downstream for small air compressors. Furthermore, through technological innovation, the company will launch high-end cutting-edge products such as nursing robots that are more in line with market needs, injecting new momentum into the company's future development.

Profit forecast and investment advice: We expect the company's net profit to reach 0.233, 0.307, and 0.401 billion yuan in 24-26, +33.39%, 31.47%, and 30.90% year-on-year, corresponding to the 24-year PE of about 15X, giving it a “recommended” rating.

Risk warning: US interest rate cuts fall short of expectations, geopolitical risks, increased competition risks, etc.