Key points of investment

Osun Electric is a leading OEM for air compressors and dry and wet vacuum cleaners in North America. It has post-real estate cycle characteristics. At the same time, the company has advantages in R&D and overseas production capacity, deep cooperation with leading brands and retailers, and localized service advantages. It is expected that its market share in the US will continue to increase. It is optimistic about the continuous development of non-US markets in the medium to long term, as well as the release of new products in tools, cleaning, and nursing robots.

Company Overview: The leading OEM company for air compressors and wet and dry vacuum cleaners in North America was established in 2009. In 2023, small air compressors/wet and dry vacuum cleaners accounted for 36%/54% of revenue, respectively. It cooperated deeply with leading retailers in North America, and was authorized by international tool brands such as Stanley. Currently, it is the leading air compressor and wet and dry vacuum cleaner segment in North America. The company's total revenue in 2023 was 1.22 billion yuan, the compound growth rate for 18-23 was 14%, net profit to mother was 0.175 billion yuan, net profit to mother was 14.4%, and the compound growth rate for 18-23 was 31%. Under scale effects and product operation optimization, the profit growth rate was faster than revenue.

Industry Overview: Export boom picks up, European and American real estate chains resonate

Small air compressor: small but beautiful track, outlet recovery cycle. Small air compressors have both downstream commercial and household demand. The market size in 2022 is 49.2 billion yuan, with a compound growth rate of 5.3% over the next 5 years. Active storage has ended in the short term, and the economy is recovering.

Dry and wet vacuum cleaners: Demand is growing steadily, and exports are picking up in the short term. There is also downstream commercial and household demand for wet and dry vacuum cleaners. In 2023, the global vacuum cleaner market was 28.8 billion US dollars, with a compound growth rate of 6.8% in the past 5 years. Active storage has ended in the short term, and the economy is recovering.

Mid-term interpretation: The US real estate chain resonates, downstream retailers have low inventories, and it is expected that they will actively replenish stocks. Small air compressors and wet and dry vacuum cleaners have certain post-real estate cycle characteristics. As can be seen from the review history, US real estate sales improved and interest rate cuts lagged from February to 3 months, US sales of household appliances and tools were basically in sync with the upward period of real estate sales, and Oussen's performance resonated with a quarter. As deduced from this, after the Federal Reserve announced interest rate cuts in September, it is expected that the first half of '25 will see a recovery in industry demand and a boost to the company's terminal performance.

Core logic 1: Strong binding between leading brands and retailers is expected to steadily increase market share to leading air compressor OEM export leaders and bind leading retailers in North America. The air compressor brand pattern is dominated by the channel's own brands. Ousheng binds leading retailers and brands, and is the leader in North America. In 2023, the company's sales to North America accounted for 29.84% of domestic exports, and 30%/80%/10-20% of the air compressor purchases in The Home Depot/Canadian Tire/Harbor Freight Tools. Currently, the company accounts for only 6.5% of total domestic exports, and there is still room for an increase in market share in new markets.

Leading professional dry and wet vacuum cleaners, authorized cooperation with leading brands. The wet and dry vacuum cleaner brand pattern is dominated by tool manufacturers, with the top five global manufacturers accounting for 61% of the market share, leading the market share by Ocent, accounting for 90%/10% of the procurement volume at Costco/The HomeDepot, and exclusively supplying Harbor Freight Tools. Currently, the company accounts for only 1.6% of the total number of vacuum cleaners exported domestically, and there is still room for improvement in the long-term market share.

Market promotion is driving 1: integrating production and sales, and constructing barriers to differentiation. We believe that the company still has room to increase its share in North America stemming from: 1) leading R&D capabilities to solve core product pain points; 2) production is vertically integrated, and the self-production rate of core motors has reached more than 80%, seizing cost advantages; 3) Malaysia is about to expand production, and overseas production capacity advantages are obvious; 4) stable cooperation with core retailers and sharing channels in multiple business models; 5) Unlike ordinary foundries, the company can provide after-sales service. Localization of the warehousing and logistics after-sales team creates differentiated service barriers.

Market growth driver 2: Accelerate the development of non-US and new markets. There is plenty of room for development in the new non-US market. The size of the European market is comparable to that of North America, but the new market channels and brand pattern are very different, and challenges and opportunities coexist. Currently, Eurosun relies on North America's leading advantages to accelerate overseas layout, including Europe, South America, Australia, Japan, South Korea, the Middle East, etc., and a breakthrough is in sight.

Core logic 2: Develop a wide range of new products and focus on nursing robots

The company focuses on pneumatic tools and cleaning appliances, and can expand a wide range of new products. The direction includes: 1) Cleaning equipment direction:

Based on the competitive advantage of the wet and dry vacuum cleaner market, it can be extended to floor scrubbers, industrial fans, etc.; 2) Aerodynamic equipment direction: rely on small air compressors to have a high market share in high-quality customers to increase the extension of pneumatic tools and pneumatic accessories downstream for small air compressors; 3) high-end cutting-edge products such as nursing robots.

Profit forecasting and valuation

We are optimistic that the company will benefit from the beta opportunities of the real estate chain recovery in the US interest rate cut cycle, and open up room for growth through increased market share and the development of new markets and new products. We expect the company to achieve operating income of 1.79/2.3/2.78 billion yuan in 2024-2026, +47.2%/+28.3%/+20.8%, achieving net profit of 0.246/0.316/0.389 billion yuan, compared to the current market value PE was 19.6/15.2/12.4, and the first coverage gave an “gain” rating.

Risk warning

Fluctuations in export demand; changes in raw material costs and exchange rates; risk of fluctuations in orders from major customers; development of new markets falls short of expectations; volume of new business falls short of expectations.