2Q24 results fell short of our expectations

The company announced results: 1) 1H24's revenue was 0.825 billion yuan, -7.3% year over year; net profit to mother was 0.111 billion yuan, +6.1% year over year; net profit after deducting non-return to mother was 0.101 billion yuan, +5.9% year over year. 2) Corresponding to 2Q24 revenue of 0.424 billion yuan, -15.8%; net profit to mother of 48.59 million yuan, -27.9% YoY; net profit of 40.2 million yuan after deduction, 42.4% YoY. 3) Announcement of mid-term dividends: Cash dividends of 0.30 yuan per share, totaling 52.52 million yuan in cash dividends, accounting for 47% of net profit attributable to mother for half a year. 4) The 2Q24 performance fell short of our expectations, mainly because the recovery in domestic and foreign massage chair demand fell short of our expectations.

Massage chairs have strong optional attributes, and domestic and foreign demand is weak: 1) Massage chairs have strong optional attributes and are highly related to the economic cycle. Currently, domestic and foreign demand is generally lackluster, and 1H24's revenue ratio is -7.3%. 2) 1H24's export revenue was 0.449 billion yuan, accounting for 56% of the main business revenue. We estimate that export revenue declined slightly year-on-year. By region, according to the interim report, there was a marked year-on-year decline in Q1 revenue in South Korea, and there was some recovery in Q2; Q1 revenue in the US region was high year on year, and the growth rate declined somewhat in Q2 due to rising sea freight rates; the 1H24 European and Middle East markets showed steady growth, and the Southeast Asian market was generally stable. 3) The 1H24 domestic sales business is 0.36 billion yuan. We estimate a year-on-year decline of more than 10%. The pressure was particularly in Q2, mainly due to the decline in offline sales and the decline in the Motorada brand. During the 618 promotion period, Rongtai's main brand's overall online sales remained basically the same year over year.

Financial analysis: 1) 1H24 gross margin was +1.8ppt to 33.2% year over year, with gross margins in China/foreign countries of 38.5%/28.4% respectively, up from the full year of 2023. 2) 1H24 sales expense ratio -1.0ppt year on year, mainly due to reduction in promotion fees and endorsement fees; management and R&D expenses ratio +0.9/+0.4ppt year over year; reduction in exchange revenue led to a financial expense ratio of +0.4ppt year-on-year. At the same time, net income from fair value changes brought about by 1H24 hedging, etc. increased by nearly 15 million yuan year-on-year, increasing profits. 3) Under the combined influence, 1H24 net profit margin was +1.7ppt to 13.5% year-on-year.

Development trends

Layout of Thai production capacity: In 2023, the company's overseas revenue accounts for 55%, of which the US accounts for about 25% of overseas revenue. In recent years, the US business has grown rapidly. In order to cope with potential future tariff policy uncertainty, the company announced that it has bought land and built a factory in Thailand. It is expected to be put into operation by the end of 2025, with a design production capacity of about 0.05 million units.

Profit forecasting and valuation

Due to weak demand for massage chairs at home and abroad, we lowered our 2024/25 net profit by 12.9%/12.5% to 0.211/0.231 billion yuan. The current stock price corresponds to 2024/25 10.7x/9.8x price-earnings ratio. Maintaining an outperforming industry rating, we lowered our target price by 46% (considering the impact of dividend deductions, the actual reduction was 28%) to 14.04 yuan, corresponding to the 12.0x/10.9x price-earnings ratio in 2024/25, which has 12% upside compared to the current stock price.

risks

Risk of fluctuations in global demand, risk of exchange rate fluctuations, risk of increased competition, risk of tariff policy changes.