Key points of investment
Incident: Quanfeng Holdings issued an operating update announcement. Sales were revised in the previous April, establishing an inflection point 1) Overall sales correction. The inflection point of operation is now: As of April 30, 2024, the company's operations continued to improve. The first four months achieved positive year-on-year growth, and showed an accelerated trend, achieving high double-digit growth in April alone. The company expects to achieve a definite increase of 15-20% in its overall growth target for 2024, showing an inflection point in operations.
2) OPE (outdoor power equipment) warehousing accelerates return to normal and orders pick up: The sales performance of the company's lithium battery OPE core brand EGO terminals is strong, and the warehousing process of major downstream customers is accelerating, driving the continuous recovery of orders.
3) PT (power tools) continues to recover: Sales of power tools are picking up, especially DIY products. Terminal sales and shipments both achieved a positive year-on-year increase in the first 4 months.
Short-term adverse factors are gradually being eliminated, and revenue growth is expected to gradually accelerate
1. Weather disturbances have been eliminated, OPE can be expected to pick up during the peak season, and terminal sales will continue to boom: the slow storage process due to poor peak season last spring will improve. Thanks to the weather, OPE terminal sales this spring are expected to continue.
2. At the end of the inventory removal cycle, when stocks are replenished at a low base, the order growth rate may accelerate significantly: According to the North American core channel Home Depot and Lowe's 2023 annual reports, Home Depot/Lowe's inventory amounts decreased by 15.71%/8.84%, respectively. Strong sales at the beginning of 2024 accelerated inventory removal. Future channels will enter the inventory replenishment cycle. Orders are expected to continue to improve, and the growth rate may be higher than the sales growth rate. The revenue growth rate of H1/H2 companies in 2023 was -26%/-36%, respectively. Currently, it is gradually entering the low base range for the same period last year, and the revenue growth rate is expected to gradually accelerate.
3. Demand for power tools is picking up under high interest rates, and future US real estate recovery will bring about demand elasticity: currently the US 30-year mortgage interest rate recorded 7.22% (2024/05/02), up from 6.61% at the end of last year (2023/12/28); sales of existing and new homes in the US fell 2.1% year-on-year in March 2024; the company's power tool division sales picked up ahead of US real estate, showing operational resilience. Currently, the decline in US real estate sales at high interest rates has been narrowing month by month. In the future, we will enter a cycle of interest rate cuts, and the recovery of US real estate will unleash the elasticity of demand for electric tools.
Long-term competitiveness is outstanding. The long-term leader in lithium battery OPE can be expected in the future1. The brand ability has been tested cyclically, and the leading position of lithium battery OPE has been established. According to the public presentation of the company's 2023 annual report, the EGO56V battery platform has sold 14 million units, ranking first in the industry's market share. The EGO brand has become the number one market share of Amazon's lithium battery OPE and the largest market share of hand-push lithium battery OPE in the US. Among the 58 most popular garden tools of the year, EGO consistently topped the list of positive reviews 45 times. As of 2023, the company became the first manufacturer to be ranked as the “Supplier of the Year” by a leading North American hardware chain for four consecutive years. We believe that as an American durable consumer product, EGO can stand out on a racetrack full of giants. EGO already has a certain brand mentality, and the comprehensive ability industry has passed the test cycle. In the future, as the OPE lithium electrification process continues, the company has the ability to continue to seize share.
2. New products and new channels have blossomed in many places to provide continuous momentum for growth:
Product development: In 2023, the company relied on battery platforms to continue to expand the OPE and power tool product ecosystem and maintain cutting-edge competitiveness in the industry.
OPE: The company develops high-pressure washers, dry/wet vacuum cleaners and mini bike products for the EGO brand to enhance the user stickiness of the EGO 56V battery platform;
PRO level PT: The company has expanded the application range of more than 40 new products and 24V platforms in FLEX; - DIY level PT: The company continues to promote new products on SKIL 4V, 12V, 20V and 40V platforms, and many of these products won the 2023 Power Tool Innovation Award.
Channel development: The company cooperates with John Deere, a well-known channel in North America, to implement a “commercialization” strategy (that is, commercial aspect). The strong combination of the two will further strengthen EGO product capabilities and channel reach. Furthermore, EGO has expanded its sales and distribution network in Europe and achieved double-digit growth in 2023, proving its ability to penetrate new markets.
Profit Forecast and Valuation:
The company is expected to achieve operating income of US$16.14/18.99/US$2,236 billion in 2024-2026, a year-on-year increase of -17.4%/17.7%/17.8%, and achieve net profit of 0.80/1.32/181 million US dollars, a year-on-year increase of -/ 65.3%/37.8%, and the current price corresponds to PE 18.76/11.35/8.24 times. We believe that Quanfeng Holdings, as the leading global brand of lithium battery garden tools and power tools, shows an inflection point in short-term operations. It has excellent long-term competitiveness and maintains a “buying” evaluation grade.
Risk warning: Overseas demand falls short of expectations; channel inventory pressure relief falls short of expectations; commercial product launch falls short of expectations