1H24 results are in line with our expectations

The company announced 1H24 results: the company achieved operating income of 0.296 billion US dollars, +7.0% year on year; net profit to mother of 0.045 billion US dollars, +37.5% year over year. The company announced an interim dividend: a cash dividend of 8.88 HK cents per share, totaling HK$0.101 billion (US$0.013 billion), accounting for 29% of net profit for the half year. The company's performance was in line with our expectations.

Product strength and channel power have improved, and revenue has grown steadily. 1) In the past two years, the company has continued to make efforts in product development, brand and channel operation. Tower fans and vacuum cleaners have become best-selling products after air purifiers, humidifiers, and air fryers, driving the company's revenue to continue to grow; on a quarterly basis, 1Q24/2Q24's unaudited sales were +1%/+24%, respectively. 2) In terms of channels, the company's transformation from online to online and offline omnichannel layout continues to increase the number of products entering North American retailers. At the same time, it has entered nearly 200 new offline retail stores in the Asia-Pacific market, driving the company's non-Amazon channel revenue +46.5% year-on-year, and the revenue share increased from 20% of 1H23 to 28% of 1H24. 3) Regionally, 1H24's revenue in North America/Europe/Asia Pacific was +13%/-19%/+43%, respectively. Europe and Asia Pacific are still key markets to expand, and the share of mature categories continues to increase, but due to the impact of Turkish channel inventory removal and some regional channel adjustments, the company's revenue growth rate in the European market has slowed in the short term.

Operational efficiency has been optimized, and profitability has reached a new high. The company's previous investment in product development was gradually transformed into an increase in product competitiveness and premium capacity, and cost optimization was brought about by the increase in scale, driving 1H24 gross margin of 48.5%, +3.4ppt compared to the previous year, a record high. At the same time, cost investment efficiency is also gradually being optimized. The 1H24 sales expense rate/management expense ratio was 15.6%/14.2%, respectively, -1.7/-1.3ppt. Under the combined influence, 1H24's net interest rate to mother was 15.1%, +3.4ppt year over year, continuing the improvement trend since 2023 and reaching a historically high level.

Development trends

The company continues to iteratively promote new products in response to user pain points. New categories such as tower fans, circulation fans, and vacuum cleaners performed brilliantly, driving the company's product share to continue to increase. In addition, the company is also actively expanding categories such as health management and small household appliances for pets. With the improvement of the company's new product iteration, channel management, and content marketing capabilities, we believe that the company's overall competitiveness is expected to further improve.

Profit forecasting and valuation

Considering that overseas demand for small household appliances is still uncertain, we lowered our 2024/2025 revenue by 7.4%/8.5% to 0.652 billion dollars/0.766 billion US dollars, but due to the increase in the company's profitability, we kept our profit forecast unchanged for 2024/2025. The current stock price corresponds to the 2024/2025 price-earnings ratio of 6.4 times/5.4 times. Maintaining an outperforming industry rating, but considering the recent decline in sector valuations, we lowered our target price by 19% to HK$5.2, corresponding to a price-earnings ratio of 8.4 times/7.1 times in 2024/2025, with 30% upside compared to the current stock price.

risks

The risk of market demand fluctuations; the risk of rising raw material prices; the risk of changes in international trade policies.