Key points of investment

Covos released its 2024 three-quarter report: In the first three quarters of 2024, Covos achieved operating income of 10.226 billion yuan, -2.90% year over year, realized net profit of 0.615 billion yuan, +1.88% year on year, and realized deducted non-net profit of 0.531 billion yuan, +1.69% year over year; among them, 2024Q3 achieved operating income of 3.25 billion yuan, -4.06% year on year, and achieved net profit to mother of 0.006 billion yuan, YoY- 69.21%, achieving net profit deduction of -0.027 billion yuan, -264.92% year-on-year.

Revenue for the quarter is under pressure, and domestic sales are expected to improve in the future

2024Q3's revenue declined slightly, in line with our previous expectations. Looking at domestic and foreign sales, we expect that the company's domestic sales of sweepers and floor scrubbers will still be under pressure in July-August, but domestic sales will enter September or benefit from the trade-in policy. Aowei Cloud Network data shows that in 2024Q3, the total online and offline retail sales of the company's sweepers and floor scrubbers were -14% and +10%, respectively. We think it is mainly related to changes in the product structure; the company's export sales are expected to grow rapidly under the joint promotion of new products and active removal of old products and lawnmower robots.

Expenses were invested at the wrong time, and the profit repair process had twists and turns

The 2024Q3 company's gross margin was +0.90pct year over year; the company's sales expense ratio was +2.97pct year over year. The announcement showed that on the one hand, the company increased market expenses for pre-sales, and new products were mainly delivered in 2024Q4, with incorrect input and output periods. On the other hand, the company laid the foundation for overseas new product launches and acted actively to accelerate the elimination of slow overseas sales products, leading to a decrease in gross profit; while 2024Q3 company management, R&D, and financial expense ratios were -0.28/+0.18/-1.51pct, respectively. The company's net profit margin for the quarter was -0.39 pct year on year.

High-frequency data improved, waiting for the fourth quarter results to reverse

Since October, the trade-in policy has been rolled out across the country. According to data from Aowei Cloud Network, the 2024W40-W42 (9.30-10.20) company's online and offline sales were +261% and +115%, respectively, and showed a sharp upward trend in volume and price. The improvement in domestic sales in the fourth quarter was highly certain. In terms of new products, on the one hand, the company's cost-effective sweeper T50 Pro complements the side brush extension function and achieved good sales results. On the other hand, the company's high-end sweeper X8 series tried “changing lanes” with a relatively unique floor washing function, and continued expansion of overseas channels. The company's major promotion results at home and abroad at the end of the year are worth looking forward to.

Maintaining the company's “buy” rating

Covos' revenue performance in the third quarter was in line with expectations, but increased cost investment affected profit performance; as the company launched new products, strengthened overseas layout, and compounded policy catalysis, revenue and profit improvements in the fourth quarter can be expected. We expect the company's revenue for 2024-2026 to be 16.1/17.4/18.7 billion yuan, respectively, +4%/+8%/+7% year over year; net profit to mother will be 1.199/1.355/1.516 billion yuan, respectively, +96%/+13%/+12% year over year, corresponding EPS will be 2.11/2.38/2.66 yuan, corresponding PE will be 27.0/23.9/21.3 respectively, maintaining the company's “buy” rating.

Risk warning: Policy implementation falls short of expectations; raw material prices and exchange rate fluctuations; external demand improvements fall short of expectations