Core views

24Q2 revenue was +36.6% year-on-year, thanks to the company seizing market share through a price-for-volume strategy. Among them, new and sub-new products became the main growth drivers, and home, furniture, and pet products all increased; Europe and America both increased, and European gross margin declined under the influence of shipping costs. The net interest rate of the two regions is estimated to be similar; the Amazon platform continued to increase rapidly on the channel, and OTTO and TEMU contributed more. Net profit to mother in 24Q2 was -27.9% year-on-year, driven by rising shipping fees+sales investment+equity incentive costs. Looking ahead, the company will continue to focus on brand building, supply chain optimization, and product serialization. It is expected that new product launch+new market and new channel development will support subsequent growth.

occurrences

The company released its 2024 semi-annual report: 2024H1's revenue was 3.721 billion yuan/ +40.7%; net profit to mother 0.172 billion yuan/ -7.73%; net profit after deducting 0.16 billion yuan/ -24.97%; basic earnings per share were 0.43 yuan/share, or -15.7% year-on-year. Net cash flow from operating activities was $0.935 billion/ +30.5%. ROE (weighted) is 5.41% /-4.37pct.

Brief review

Thanks to the combined efforts of products and channels, 24Q2 revenue continued to increase. 24H1 revenue of 3.721 billion yuan/ +40.7%, 24Q2 revenue of 1.88 billion yuan, +36.6% year-on-year, and +2.1% month-on-month, maintaining the high growth trend in a single quarter since 23Q4, including:

1) By category: The company seizes market share through a price-for-volume strategy, and the home, furniture, and pet series are all growing. 24H1's home, furniture, sports, outdoor, and pets achieved revenue of 13.4, 1.9, 0.13, and 0.31 billion yuan respectively, compared to +50.2%, +39.4%, +3.4%, and +37.3%. The sports and outdoor categories were affected by European climate and shipping factors. The company's contribution to new products increased, and the second new product (product launched in 2023) performed well in the first half of the year.

The gross profit margin of 24H1 home and furniture is 35.94% /-2.06pct, 34.68% /-1.65pct. The main reason is that the company quickly occupies more market share and reduces the average price of products.

2) By region: Growth is accelerating in the Americas, and gross margin in Europe has declined. 24H1 Europe, North America, Japan and other regions achieved revenue of 22.8, 1.34, 0.03, and 0.02 billion yuan, with year-on-year increases of 41.2%, 41.1%, 30.6%, and 39.4%. The gross margin of 24H1 Europe and America is 36.12% /-3.66pct and 33.15% /+1.98pct. The estimated decline in gross margin in Europe is mainly affected by rising sea freight rates. The net interest rate gap between 24H1 America and Europe is estimated to be small.

3) Channel division: The Amazon platform continues to grow at a high rate, with OTTO, TEMU, etc. contributing incrementally. 24H1 achieved B2C and B2B revenue of 3.18 billion yuan, 0.49 billion yuan, +5.7% year-on-year, including AmazonB2c, OTTO, independent sites, and other B2C revenue of 25.4, 0.19, 0.11, 0.34 billion yuan, up 42.7%, 97.1%, 91.3%, and 68.3% year-on-year, accounting for 69.1%, 5.0%, 3.0% and 9.4% of revenue. The Amazon platform continues to grow steadily, and the OTTO platform maintains a strong growth trend in 2023.

Higher shipping fees+sales investment+equity incentive costs are dragging down performance. 24Q2 net profit to mother and net profit not to mother were 0.071 billion yuan/ -27.9% and 0.064 billion yuan/ -50.4% respectively, mainly due to: 1) the company's market share strategy, the average unit price of product sales decreased year on year, and the marketing expenses for new product promotion increased. 24H1 and 24Q2 sales expense ratios were 24.7% /+1.7pct, 25.0% /+2.1pct; 2) The year-on-year increase in shipping costs due to the Red Sea incident (24H1 Shanghai Port exported to basic European ports and basic ports in the US and West The average freight rate increased by 224.61% and 188.58% from the average freight rate in 2023), and storage expenses increased due to the expansion of self-operated and tripartite overseas warehousing services; 3) exchange gains and losses were converted from 24H1's 17.726 million yuan earnings to 6.5968 million yuan; 4) additional 2024 equity incentive share payment fees of 7.2477 million yuan. 24Q2 The company's gross margin was 33.9% /-2.2pct, and the net margin was 3.8% /-3.4pct. The 24H1 sales, management, R&D, and finance rates were 24.7%, 3.6%, 1.0%, and 0.8%, respectively, +1.8, -0.5, -0.3, and +2.5pct compared to the same period.

The company has achieved results in brand building, supply chain optimization, product serialization, and development of new channels. 1) Brand: A brand matrix with the Group's main brand “SONGMICS HOME” leading the three major product brands has been established; 2) Product: In the first half of 2024, the company successively launched serial products such as eKHOCollection and LuizCollection to gradually cultivate the consumer mentality of the main brand. In addition, implement product classification and differentiation management, adjust product strategies in a timely manner, and eliminate SKUs with poor tail performance. 3) Supply chain: In the first half of 2024, the company added 3 new tripartite cooperative warehouses in the US East, US, China, and South America, forming a 5-warehouse layout covering the US East, West, South America, North America, and China. The proportion of spontaneous orders in the US market increased from 8.5% in January to 15.7% in June; the European region set up tripartite front warehouses in France, Spain, and Italy. By the end of June 2024, the company's overseas self-operated warehouse area had reached more than 0.35 million square meters. 4) New channels: While continuing to increase the market share of the Amazon platform, the company continues to expand traffic opportunities on emerging platforms such as Temu and SHEIN, as well as the Hobby Lobby offline incremental market. After Temu opened semi-hosting in March 2024, the company launched a website in the US as the first batch of semi-hosted sellers.

Investment advice: Based on the impact of shipping costs on the company's profit, the company's revenue for 2024-2026 is expected to be 7.62, 9.19, and 11.03 billion yuan, respectively, up 25.4%, 20.0% year-on-year; net profit to mother is 0.379, 0.543, and 0.657 billion yuan (previous values were 0.486, 0.586, 0.697 billion yuan), corresponding to PE 17.9x, 12.5x, 10.3x, maintaining a “buy” rating.

Risk warning: Third-party e-commerce platform operating risk: The company mainly sells products through overseas online B2C platforms such as Amazon, Cdiscount, ManoMano, and eBay. The online B2C platform is the company's main sales channel. However, if there is a major change in the business model, business strategy, or operating stability of such e-commerce platforms, it may adversely affect the company's operating performance.

Weak overseas demand and inventory management risks: Currently, Europe and the US are still in a state of high inflation. If the market environment for the company's products undergoes major adverse changes in the future, market competition intensifies, or the company fails to optimize inventory management and reasonably control inventory size, which may lead to slow product sales and inventory backlogs, then the company may need to prepare for large price drops or report losses on such inventory, which will adversely affect the company's financial situation and operating results.

Risk of changes in tax policies: The company's German, American and Japanese subsidiaries mainly sell products to consumers through overseas e-commerce platforms, and revenue mainly comes from countries or regions such as Europe, North America, and Japan. There are many countries or regions involved in the overall business process of the company, and regulations related to circulation tax, customs duties, income tax and other taxes in various overseas countries or regions are complicated. If the tax policies of the main revenue source countries or regions change significantly in the future, and the company fails to correctly understand and adjust in a timely manner according to changes in tax policy, it may adversely affect the company's operations.