1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 0.571 billion yuan, -3.6% year on year; net profit to mother 0.038 billion yuan, -11.2% year on year; net profit without deduction of 0.025 billion yuan, or -31.8% year on year. Downstream demand was weak, and performance fell short of our expectations.

On a quarterly basis, 1Q/2Q24 achieved revenue of 0.271/0.3 billion yuan, respectively, +7.2%/-11.6%, respectively; net profit to mother of 0.013/0.025 billion yuan, respectively, of -8.0%/-12.8%, respectively.

Development trends

Downstream demand is weak, and revenue performance is under pressure. 1H24's revenue fell 3.6% year on year, by product: 1) Indoor fitness equipment: revenue was 0.384 billion yuan, up 0.8% year on year. Growth slowed under pressure from demand, but we expect the company's performance to be superior to the industry average under the promotion of the new store model. 2) Outdoor fitness equipment: Revenue of 0.059 billion yuan, down 38.9% year on year. We judge that it was mainly affected by weak demand and the pace of project acceptance. 3) Display stand: revenue of 0.106 billion yuan, a year-on-year increase of 4.7%.

Gross margin continued to improve, and net profit margin declined somewhat due to cost investment. The company's 1H24 gross margin was +2.3ppt to 32.3% year over year, of which 2Q24 gross margin was +2.7ppt to 32.9% year over year. We think it was mainly due to the decline in raw material prices. In terms of expenses, the company's expense ratio for the 1H24 period was +4.4ppt. Among them, sales, management, finance, and R&D expenses rates were +1.9/+1.4/+0.1/+1.0ppt to 12.6%/9.0%/0.2%/3.3%, respectively. The company increased its investment in sales and R&D, and the cost ratio increased markedly, causing the company's net interest rate to fall 0.6ppt to 6.7% year on year.

Moving from products to professional sports solutions. The company is user-centered, and its business strategy is gradually shifting from a product manufacturer to a professional sports solution service provider, seeking new products, channels, and marketing. On the product side, while promoting product intelligence, the I5 smart treadmill newly launched this year won the “Innovation and Promotion Award” at the 2024 Sports Expo. On the other hand, the company continues to improve its product matrix, from providing products to providing a complete set of sports solutions. In terms of channels, promote efficiency upgrades in traditional stores, explore a new store model of “scientific fitness+equipment sales+door-to-door service”, and actively develop overseas market layout. In terms of marketing, as a leading domestic fitness equipment brand, Shu Hua has been a partner of the Chinese Olympic Committee for many years. It has become the official fitness equipment supplier for the Chinese sports delegation to the Paris Olympics this year. Various products have settled in “China Home”, and its professional brand image has been further promoted and strengthened.

Profit forecasting and valuation

Considering that downstream demand recovered below expectations, we lowered our 2024/2025 revenue forecast by 8%/8% to 1.501/1.674 billion yuan, and lowered net profit to mother by 15%/9% to 0.123/0.15 billion yuan. The current stock price corresponds to 25/20 times the price-earnings ratio. Maintaining an outperforming industry rating, based on profit forecasting adjustments, and considering changes in market risk appetite, we lowered our target price by 27% to 9.5 yuan, which corresponds to a price-earnings ratio of 32/26 times 2024/2025, and has 30% upside compared to the current stock price.

risks

Competition in the industry has intensified, raw material prices have fluctuated greatly, and the new model of stores has fallen short of expectations.