2021 and 1Q22 results in line with our expectations

Xiamen Solex High-Tech Industries (Solex) announced its 2021 and 1Q22 results: In 2021, revenue grew 46.3% YoY to Rmb2.98bn, attributable net profit grew 11.4% YoY to Rmb301mn, and recurring net profit increased 13.1% YoY to Rmb253mn. In 1Q22, revenue grew 49.3% YoY to Rmb793mn, attributable net profit fell 1.3% YoY to Rmb73mn, and recurring net profit dropped 3.2% YoY to Rmb64mn. The results were in line with our expectations.

By quarter, revenue grew 64.2%, 31.0%, 46.7%, and 49.0% YoY in 1-4Q21. Attributable net profit increased 110.1% and 17.3% YoY in 1Q and 4Q but fell 18.0% and 9.5% YoY in 2Q and 3Q.

Trends to watch

IDM expansion underway; Solex Home grew rapidly. Revenue from innovative design manufacturer (IDM) business grew 42.6% YoY to Rmb2.88bn, with gross margin (GM) down 4.5ppt YoY to 30.0%. Specifically, revenue from kitchen & bathroom products grew 41.4% YoY to Rmb2.61bn, with GM down 5.7ppt YoY to 29.9%. Revenue from beauty & health products grew 144.8% YoY to Rmb114mn, with GM up 0.7ppt YoY to 52.9%. Revenue from Solex Home grew 468.3% YoY to Rmb102mn, with GM down 20.4% YoY to 15.8%. We attribute this to offline stores’ business adjustment and expect GM to recover gradually.

Higher raw material prices weighed on GM; expect profitability to recover. In 1Q22, GM fell 2.8ppt YoY to 29.0% due to higher raw material prices. The selling expense ratio grew 1.3ppt YoY to 4.8%, and G&A and R&D expense ratio fell 1.1ppt YoY to 13.4%. The financial expense ratio increased 2.0ppt YoY to 0.9%. As a result, the net margin dropped 4.7ppt YoY to 9.2%.

Dual-driver strategy: IDM and Solex Home fueled steady earnings growth. 1) IDM: Solex continued to upgrade its kitchen & bathroom products and prioritized innovation. It improved the capability and scale of intelligent closestool R&D and manufacturing via Bestter. Meanwhile, the exploration of beauty & health products in subsegments has accelerated. 2) Solex Home: The firm continued to optimize and standardize its application scenarios and models, fine-tune management, and improve flexible production. Solex plans to construct 10 experience centers for self-operated brands in Putian, Nanchang, Beijing, and other cities. We expect Solex’s advantage of having an integrated presence in the supply chain to emerge with its scale expansion.

Financials and valuation

We maintain our 2022 attributable net profit forecast at Rmb379mn and introduce 2023 attributable net profit forecast of Rmb493mn. The stock is trading at 17x 2022e and 13x 2023e P/E. Maintain OUTPERFORM. Given the market’s lower risk appetite, we cut our TP 9% to Rmb20 (21x 2022e and 16x 2023e P/E), offering 27% upside.

Risks

Sharp fluctuations in raw material prices; volatile exchange rates; strict regulations on the real estate industry.