2Q24 results were better than our expectations

The company announced 1H24 results: operating income of 6.976 billion yuan, -2.35% YoY; net profit to mother 0.609 billion yuan, +4.26% YoY. Corresponding 2Q24 revenue was 3.502 billion yuan, -10.39% YoY; net profit to mother was 0.311 billion yuan, +20.67% YoY. The company's 2Q24 revenue fell short of our expectations due to domestic sales pressure, and 2Q24 performance was better than our expectations, mainly due to the increase in the company's share of new products and cost control results.

Domestic sales are under pressure, and overseas revenue continues to grow relatively well. 1H24/2Q24 company revenue -2%/-10% YoY.

1) Looking at 1H24 by business: Covos brand service robots (including a point) earned -3% YoY, with revenue in China -10% YoY, accounting for 61%; overseas revenue +11% YoY (excluding +17% YoY), accounting for 39%. The revenue of the Tianke brand was +2%; its revenue in China was -11%, accounting for 60%; overseas revenue was +32%, accounting for 40%. 2) Looking at 2Q24 by business: We estimate that the revenue of the Covos brand is -15% (the year-on-year decline in sweeper revenue is one digit higher), and the revenue of the Tianke brand is -4%. We estimate that the pressure mainly comes from the domestic market, and overseas continues to grow rapidly in 1Q. According to AVC data, online sales of Covos sweepers in 2Q24 were -19% year-on-year, and online sales of additional floor washers were -16% year-on-year.

Optimization of sales expenses and improvement of profitability. 1) The 2Q24 company's gross profit margin was 51.0%, +3.5ppt year over month, mainly due to the increase in the share of new product sales with a better cost structure. Among them, the gross margin of the Covos brand was +5.3 ppt year over year, and the gross margin of the Tianke brand remained flat year on year, +2ppt compared to the previous month.

2) The company began controlling marketing expenses in 1Q24. In 2Q24, the company's sales expenses were -19.9% year-on-year, and the sales expenses ratio was -3.6ppt to 30.8% year-on-year, mainly due to a decrease in advertising, marketing and platform service fees. 2Q24 The company's management/R&D/finance expense ratio was +0.8/+1.2/+1.1ppt. 3) Under the combined influence, the company's net interest rate for 2Q24 was 8.9%, +2.3ppt year over year and +0.3ppt month over month.

Development trends

1) The company recently released a number of new sweepers in China, and plans to continue improving the product matrix and optimizing the cost structure in the second half of the year. We are optimistic that the increase in the company's share of new product sales will lead to a continuous recovery in gross margin.

The company continues to develop overseas markets, and we look forward to expanding the price band of the company's overseas products and increasing its market share.

2) The main theme of the company is to control expenses and optimize business performance throughout the year. We believe that the company's profitability is expected to continue to improve. 3) The company announced a new phase of stock options and restricted stock incentive plans, and employee stock ownership plans to increase employee motivation. The performance assessment target is: based on the company's 2023 revenue, the revenue growth rate for 2024/2025/2026/2027 is not less than 2%/5%/8%/10%.

Profit forecasting and valuation

Due to pressure on the company's domestic sales revenue, we lowered 2024/2025 revenue by 9%/16% to 16.05/17.2 billion yuan, but considering the company's remarkable fee control results, we kept our net profit forecast unchanged for 2024/2025. The current stock price corresponds to 17.0/12.6 times the 2024/2025 price-earnings ratio. Maintaining an outperforming industry rating, but due to the decline in the sector's valuation center, we lowered our target price by 16% to 50.21 yuan, which corresponds to 21.2/15.8 times the 2024/2025 price-earnings ratio, and has 25% room to rise compared to the current stock price.

risks

Risk of fluctuating market demand; risk of increased market competition; risk of new product performance falling short of expectations.