Key points of investment
On March 13, 2024, Quanfeng Holdings issued a profit warning:
For the full year of 2023, the Group expects a net loss of approximately US$0.35 to US$40 million, compared to net profit of US$139 million in 2022. Earlier, it was announced on November 17, 2023 that the Group recorded net profit of US$21 million in the first 10 months of 2023, down 80% from the previous year, putting pressure on operations.
The reason for the change in performance is mainly due to reduced orders, rigid expenses, and inventory impairment due to customer visits (1) Customer departure: North American supermarkets are important customers of the company. Facing macroeconomic uncertainty, they have adopted more conservative inventory policies, leading to a decrease in the number of orders placed, leading to a decline in the company's revenue.
(2) Cost rigidity: The company currently focuses on channel expansion and new product launch, and is still investing in product development and sales channels. We believe that due to the decline in revenue, some sales and R&D expenses cannot be reduced in the same proportion as there is a certain rigid expenditure situation, so the R&D expenses rate and sales expense ratio have increased. The company practices a long-term approach and has invested resources under revenue pressure to enhance channel richness and maintain the lead in commercial product lines and new products. It is expected that there will be gains in the future.
(3) Inventory impairment: In 2023, the company calculated additional provisions for inventory impairment and warranty. According to Antec data, from January 3 to December 28, 2023, the average price of domestic 99.5% battery-grade lithium carbonate dropped sharply to 101,000 yuan/ton. We expect the reduction in lithium battery inventory in the company's raw materials to have a significant impact.
(4) In addition, does the loss of the associated company also have a certain impact on the company's profits? Looking ahead to 2024: The impact of adverse factors will gradually disappear, and operations will return to an upward channel. Industry level: the trend of lithium electrification in the industry will not abate. (1) In the long run, the trend of lithium electrification in the OPE industry is on the rise. In 2024, California began banning the sale of fuel OPE. As the leading lithium battery OPE company, Quanfeng Holdings is expected to continue to enjoy lithium battery penetration dividends; (2) In the short term, inventory disturbances gradually subside and demand bottoms up, and orders are expected to resume. According to the 2023 annual reports of the core North American supermarket channels Walmart, Home Depot, and Lowe's, the inventory of the three companies decreased by -3%/-15.7%/-8.8%, respectively, over the same period last year, and the North American supermarket channel may have come to an end. In addition, the weather factors disrupting OPE demand in 2023 are short-term factors. Combined with high or falling federal funds interest rates, industry demand may have bottomed out and rebounded.
Company level: Quanfeng's core competitiveness remains undiminished. With industry demand under pressure in 2023 due to weather and interest rate hikes, it is expected that the company's terminal sales will continue to grow steadily, reflecting EGO's strong brand strength in the terminal market. (1) In terms of products, the company focuses on investment in R&D resources, and product strength is expected to continue to lead the industry.
(2) In terms of channels, starting in 2023, the company has had a strategic cooperation with John Deere. The two will deepen cooperation in the future, which is expected to inject new growth momentum into the company. (3) Profit level: Benefiting from product structure optimization, the share of independent brands will further increase, driving gross margin to continue to increase, there is plenty of room for optimization of various expenses, gradually weakening the impact of impairment, and profits are expected to recover rapidly.
Profit Forecast and Valuation:
The company is expected to achieve operating income of 13.79/15.32/19.05 billion US dollars in 2023-2025, up -30.7%/11.1%/24.4% year on year, and achieve net profit of -0.35/0.72/133 million US dollars, up -125.4% /-/ 84.2% year on year, and current price corresponding PE is -/15.3/8.3 times. We believe that Quanfeng Holdings is the leading garden tool and power tool brand operating globally, and high-quality growth is expected to drive the company's dynamic price-earnings ratio repair and maintain a “buying” evaluation grade.
Risk warning
Overseas demand falls short of expectations; channel replenishment falls short of expectations; commercial product launches fall short of expectations