1H22 results in line with our forecast

Solex High-Tech Industries announced its 1H22 results: Revenue, attributable net profit, and recurring net profit rose 42.43%, 15.00%, and 41.71% YoY to Rmb1.71bn, Rmb156mn, and Rmb172mn, in line with our expectations, mainly driven by rapid order growth and earnings boost from acquired company Bestter. Quarterly, revenue grew 49.30% YoY in 1Q22 and 36.99% YoY in 2Q22 to Rmb793mn and Rmb919mn, and attributable net profit fell 1.26% and increased 34.35% YoY to Rmb73mn and Rmb83mn.

Trends to watch

Swift earnings growth backed by dual-engine strategy. By segment, revenue from its innovative design manufacturing (IDM) business in 1H22 grew 42.22% YoY to Rmb1.66bn and attributable net profit rose 24.85% YoY to Rmb225.43mn, with gross margin (GM) down 1.83ppt YoY to 29.95%. Specifically, revenue from kitchen & bathroom products grew 48% YoY to Rmb1.57bn, and revenue from beauty & health products surged 122% YoY to Rmb77.28mn. Revenue from Solex Home grew 49.06% YoY to Rmb54.68mn and attributable net loss narrowed from Rmb45.03mn a year ago to Rmb69.55mn, with GM down 1.35ppt YoY to 13.59%. By region, domestic business revenue in 1H22 rose 43% YoY to Rmb1.24bn (72.20% of total), while overseas revenue gained 40% YoY to Rmb476.08mn (27.80% of total).

Gross margin slightly down on M&A deal; expense control effective. In 1H22, the firm’s GM shrank 1.83ppt YoY to 29.42%, mainly because cost outpaced sales after the firm’s acquisition of Bestter. Overall expense ratio in 1H22 fell 1.83ppt YoY to 16.2%, with selling, G&A and R&D, and financial expense ratios reaching 4.72%, 12.87%, and -1.39% (up 0.79ppt, down 1.27ppt and down 1.35ppt YoY). In 1H22 net margin declined 2.17ppt YoY to 9.11%.

Organic growth of IDM and Solex Home business to boost earnings. IDM: Solex continued to upgrade its kitchen & bathroom products and prioritized innovation. Smart closestool producer Bestter, which the firm acquired, recorded profit of Rmb19.66mn in 1H22, boosting the earnings growth of Solex. Solex Home: The firm continued to optimize and standardize its application scenarios and models. Its experience centers for self-operated brands in Xiamen and Quanzhou have opened, and another four in Putian and Nanchang are in the pipeline. We think these efforts will help drive continued earnings growth of Solex Home.

Financials and valuation

Given the slowdown in overseas demand and the ongoing adjustments of Solex Home, we trim our 2022 and 2023 attributable net profit forecasts by 9% and 13% to Rmb343mn and Rmb428mn. The stock now trades at 17x 2022e and 14x 2023e P/E. We maintain OUTPERFORM and cut TP by 10% to Rmb18, implying 21x 2022e and 17x 2023e P/E, offering 23% upside.

Risks

Sharp fluctuations of raw material costs and FX rates; COVID-19 spread and resurgence worldwide.