Investment advice
We upgraded our Rambler rating to outperform the industry. The reasons are as follows:
Revenue and profit both increased, and both domestic and foreign sales performed well: 1) The company achieved revenue of 2,694 billion yuan in 2023, +21.64% year over year; net profit to mother was 420 million yuan, +70.17% year over year. 1Q24 achieved revenue of 679 million yuan, +25.08% year over year; net profit to mother of 109 million yuan, +43.44% year over year. The company's performance exceeded our expectations, and both revenue and profit reached record highs, mainly due to impressive sales performance of new products and improved profit margins. 2) In 2023, the company's headphone/audio business revenue was +22%/+21% year-on-year, and gross margin was +5.4ppt /+3.9ppt to 37.3%/39.3% year-on-year, respectively. 3) By region, the company's domestic/export revenue in 2023 was +21%/+36% year-on-year, and gross margin was +5.1pp/ +5.0ppt to 36.8%/42.6% year-on-year, respectively.
The sub-brands performed well, and product innovation drove growth: 1) The company's product matrix is perfect, and all price segments are covered. The sub-brands Huazai and HECTATE target different customer groups such as female users and e-sports players to explore segmented racetrack needs. The pricing complements the main Rambler brand, which focuses on the cost-effective market, and drives the company's business growth. 2) Products such as IP co-branded headphones, high-end speakers, and open headphones launched in 2023 meet the needs of young consumers. On the basis of existing acoustic technology advantages, the design is more stylish, providing multiple models and styles to choose from, and increasing the share in the competitive acoustic product market. 3) The company's market response is rapid, the pace of new product iteration is fast, and the number of SKUs is large, but the inventory remains at a healthy level, and the number of inventory turnover days dropped by 18 days in 2023. Free cash flow has also maintained a rapid growth trend, reflecting good operating capacity and efficiency.
The TWS headphone market is picking up, and the emerging category of OWS earphones is expected to take over the growth: 1) According to Canalys, 1-4Q23 global TWS headphone shipments were -10%/+8%/+4%/+7% year-on-year, respectively, and the scale of the industry has recovered. 2) In terms of the Chinese market, according to Lotu Technology, the sales volume of the headphone/headset market in China was +9% to 98.95 million pairs in 2023; of these, OWS earphones sold +114% year-on-year to 10.57 million pairs in 2023, accounting for 10.8% of the overall market. OWS earphones have the characteristics of being comfortable to wear, clean and stylish, and we are optimistic that they will become a new growth point for the headphone industry.
What is our biggest difference from the market? The market believes that the company's traditional TWS headphone business is facing the challenge of falling demand. We believe that there is still plenty of room for growth in the company's emerging business and overseas market expansion.
Potential catalysts: New product performance exceeded expectations; export sales expansion exceeded expectations.
Profit forecasting and valuation
We raised our 2024 profit forecast by 58% to 486 million yuan, and introduced a 2025 profit forecast of 532 million yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 23.5 times/21.5 times. The company's fundamentals have improved significantly. The rating was raised to outperform the industry rating, and the target price was raised 58% to 15.80 yuan, corresponding to the 2024/2025 price-earnings ratio of 28.9 times/26.4 times, with an upward margin of 23%.
risks
Market demand fluctuation risk; market competition risk; exchange rate fluctuation risk.