Event: On April 25, 2024, Rongtai Health released its 2024 quarterly report. 2024Q1 revenue/net profit attributable to mother/net profit excluding non-return to mother were 4.01/0.63 billion yuan, respectively, or +3.86/+67.31/ +136.04% year-on-year, respectively. Net cash flow from operating activities was -150 million yuan, -813.4% year-on-year, mainly due to an increase in due payments for purchased goods compared to the same period last year.

2024Q1 revenue is rising steadily, and domestic sales performance is expected to be better than export sales. 2024Q1's revenue was 401 million yuan, +3.86% year over year. The performance was steady. Based on the lower 2023Q1 base, it was slightly lower than expected. In terms of domestic sales, the offline channel company achieved steady growth through deepening channel transformation in 2023. It is expected that 2024Q1 will maintain a good trend, and revenue may grow in double digits; based on the current overall development trend of e-commerce platforms, the revenue of Tmall and JD is expected to remain stable, and Douyin will continue to grow rapidly, or by double digits as a whole. In terms of export sales, South Korea's orders have recovered after 2023H2. It is expected that 2024Q1 orders will continue to grow, but considering the pace of delivery, they may be under pressure in the short term; the North American market will pick up quarterly after 2023Q2, and it is expected to maintain a good growth trend in 2024Q1; and other regions are expected to remain stable. Looking ahead, we are optimistic about steady domestic growth and rapid growth in the North American market. We expect the Korean market to resume growth and see results in the expansion of the European, American and Southeast Asian markets.

2024Q1 gross margin both increased significantly, and the optimization of sales and financial expense ratios led to a significant reduction in the period expense ratio. Gross profit margin: 2024Q1 was 35.88%, +6.60pct year-on-year. It may mainly be due to a combination of internal cost reduction and efficiency, optimization of the North American product structure, and a reduction in revenue share in the Korean market where gross margin is relatively low. Expense ratio: 2024Q1 sales/management/R&D/finance cost rates were 9.80/5.12/5.03/ -2.00%, respectively, -1.25/+0.78/+0.56/-3.40pct, respectively. The reduction in sales expenses rates was mainly due to a reduction in endorsement fees, and the financial expenses ratio was greatly optimized or increased due to exchange earnings. Net interest rate to mother: 2024Q1 was 15.66%, +5.94pct year-on-year, mainly contributing to the increase in gross margin and the optimization of the period expense ratio, which was hampered by a decrease of 4.13pct in net return on investment.

Investment advice: The company is a leader in the domestic massage chair industry. Domestic and offline channels continue to sink to open up more empty markets and increase single store output. Online use emerging channels and new media marketing to increase brand awareness and help sales growth. The overseas North American market is growing rapidly and the product structure continues to be optimized, and it focuses on developing potential markets in Southeast Asia and Europe. The share and profitability are expected to continue to increase. We estimate that in 2024-2026, the company's net profit to mother will be 244/2.93/347 million yuan, the corresponding EPS will be 1.76/2.11/2.50 yuan, respectively, and the PE corresponding to the current stock price will be 13.03/10.87/9.18 times, respectively. Maintain a “Recommended” rating.

Risk warning: sharp rise in raw material prices, concentration of major customers, sharp depreciation of exchange rates, intensification of industry competition, extension of the construction cycle of fund-raising investment projects, or lower project implementation results than expected.