Investment advice

The open earphones (OWS earphones) market is growing rapidly, and the company's 618 sales performance is impressive. According to JD data, OWS headphone turnover during the 618 period was +120% year-on-year. The company ranks third among JD's headphone sales brands and second in speaker sales. We recommend focusing on the investment opportunities brought by Ramblers due to performance catalysts and industry development.

rationales

The OWS headphone market is developing rapidly, and the company already has a forward-looking layout: 1) According to Lotu Technology data, China's OWS earphones sold 10.57 million pairs in 2023, +114% year-on-year; in 1Q24, online sales of OWS earphones in China were +148% year-on-year, accounting for 14.4% of the total headsets. According to Magic Mirror data, the GMV of online Chinese OWS earphones in 1Q24 reached 0.99 billion yuan, +337.9% over the same period last year. 2) Compared with traditional headphones, OWS headphones have the advantages of comfortable wearing, ear canal health, and stylish shape. They are more suitable for office, sports, etc., and the penetration rate continues to increase. 3) The company has deployed 7 products in the OWS headphone field, covering the 300-800 yuan price range. We are optimistic that by developing OWS headsets, the company will open up a new path in the highly competitive headphone market and form a new growth point.

The company has benefited from the trend of upgrading demand among white brand headphone users, and high-end products have also made a breakthrough: 1) We believe that the branding of mid-range and low-end white brand headsets is the general trend. The company's products have performance advantages, pricing advantages, and rapid iteration advantages. Through excellent sound quality, rich SKU selection, and attractive prices, we believe they can seize the white card share. 2) The company is actively promoting product innovation and cultivating micromolecular brands. It has launched 1,000 yuan best-selling items such as Huazai Neo-X speakers, driving ASP upward. The gross margins of earphones and audio products in 2023 were +5.4ppt and +3.9ppt, respectively. The brand upgrade was very effective.

New retail strategies help increase market share, and overseas sales contribute additional volume: 1) The company achieved rapid growth in performance by using young teams, promoting marketing through new channels such as Xiaohongshu, and consolidating marketing content. In 2023, the company's e-sports and Xinzao subsidiaries achieved revenue of 0.38 billion yuan and 0.35 billion yuan respectively, which had a significant impact on performance. 2) Overseas, the company's North American and Japanese subsidiaries have been established for more than ten years.

After years of hard work, its bookshelf speakers etc. are already well known in Europe and America. In recent years, the company has actively promoted direct cross-border e-commerce channels to explore markets such as Europe, America, Japan, South Korea, and Southeast Asia. In 2023, the company's overseas revenue was +36% year-on-year, higher than the domestic sales growth rate; overseas revenue accounted for 23%.

Profit forecasting and valuation

Considering the rapid growth of the OWS headphone market and the company's product strength, we kept our profit forecast for 2024 unchanged and raised our profit forecast for 2025 by 8% to 0.574 billion yuan. Maintain outperforming industry ratings. The current stock price corresponds to 24x and 20x price-earnings ratios in 2024 and 2025. Maintain the target price of 15.80 yuan, corresponding to the price-earnings ratio of 29 times and 25 times in 2024 and 2025, with an upward margin of 23%.

risks

Risk of new business development falling short of expectations, risk of market competition, risk of market demand fluctuation.