Incident: Covos publishes its 2024 mid-year report. In the first half of 2024, the company achieved revenue of 6.98 billion yuan, YoY -2.4%; realized net profit to mother of 0.61 billion yuan, YoY +4.3%. After conversion, the 2024Q2 company achieved revenue of 3.5 billion yuan in a single quarter, YoY -10.4%; realized net profit of 0.31 billion yuan to mother, and YoY +20.7%. The proportion of the company's new sweepers increased, and the gross margin of the sweeper business improved markedly, driving an increase in overall profitability.

Domestic demand was under pressure, and Q2 revenue growth declined month-on-month: the company's Q2 revenue growth rate was 2024q1-17.7pct compared to 2024q1-17.7pct. We believe that the company's overseas business continues to grow rapidly, mainly due to a slowdown in domestic revenue. According to Aowei data (mainly online statistics on Tmall and Jingdong platforms), the 2024Q2 Covos sweeper's online sales were -20% YoY (Q1 was -14%), and the online sales of the 2024Q2 scrubber were YoY -15% (Q1 was +12%). By region in the first half of the year, the overseas revenue of the company's Covos brand was +11% (estimated domestic revenue growth rate was about -11%), and the overseas revenue YoY of the Tianke brand was +32% (estimated domestic revenue growth rate was about -11%).

The proportion of new sweepers increased, and Q2 gross margin increased year-on-year and month-on-month: the company's Q2 gross margin was 51.0%, +3.5pct year over year, and 2024q1+3.9pct month-on-month. 2024H1's all-purpose sweeper products shipped 0.731 million units, YoY +8.8%, and the contribution rate of new products reached 54.2%. The cost structure of new products is more competitive, driving the overall gross margin of the brand. Along with the increase in the proportion of new sweepers, the Q2 Covos brand gross margin was +5.3 pct year over year.

Sales expenses were significantly optimized, and Q2 profitability increased year over year: the company's Q2 net profit margin was 8.4%, +2.3 pct year over year. In addition to the year-on-year increase in gross margin, the company's sales expense ratio declined significantly. In Q2, the company's sales expenses ratio in a single quarter was 30.8%, -3.6 pct year on year.

We believe that due mainly to the fact that advertising and platform service fees have dropped a lot, the proportion of 2024H1's revenue was 4.2pct year over year. The company's gross sales margin in Q2 was +7.1pct. Compared with Q1, there was also an increase of 0.7 pct, reflecting an increase in the profitability of the company's main business. The year-on-year increase in the company's gross sales margin in Q2 was higher than the increase in net interest rate due to: 1) the Q2 management/R&D expense ratio +0.8pct/+1.2pct; 2) the company's Q2 asset impairment losses and credit impairment losses together accounted for -1.8% of revenue (0.7% in the same period last year).

Issuing an equity incentive plan to motivate employees: 1) The company announced the 2024 stock options and restricted stock incentive plan. The total number of incentive recipients was 1,033. The company plans to grant 17.095 million share options, accounting for 3.0% of the total share capital, and 7.908 million restricted shares, accounting for 1.4% of the total share capital. The performance assessment target is: based on the 2023 revenue of listed companies, the 2024/2025/2026/2027 revenue growth rate is not less than 2%/5%/8%/10%. 2) The company announced the 2024 employee stock ownership plan. The total number of participants was no more than 11, and the shareholding plan size was no more than 3.212 million shares, accounting for 0.6% of the total share capital. The performance assessment target is: based on the 2023 revenue of listed companies, the 2024/2025/2026/2027 revenue growth rate is not less than 2%/5%/8%/10% (trigger value, target value is 4%/7%/10%/12%, the trigger value does not reach 80% of the target value, and reaches 100% of the target value).

Investment advice: As a leader in the sweeping robot industry, Covos has technical, channel and supply chain advantages, continuously optimizes the product and cost structure, and the business scale is expected to remain stable.

The company's operations in 2023 were heavily influenced by the industry environment and competitive factors. There is plenty of room to increase the popularity rate of the sweeper category. The sweeper industry is expected to recover in 2024, the company adjusts its business strategy, and profitability is expected to gradually recover. The company's EPS is expected to be 2.47/2.70/3.02 yuan from 2024 to 2026, with a 6-month target price of 49.40 yuan, corresponding to the 2024 PE valuation of 20x, maintaining the buy-A investment rating.

Risk warning: The RMB appreciated sharply, and the cost rate improvement fell short of expectations due to increased competition.