1H22 results miss our expectations

Joy Kie announced its 1H22 results: Revenue dropped 13.9% YoY to Rmb1.36bn, net profit attributable to shareholders increased 18.8% YoY to Rmb101mn, and recurring attributable net profit grew 23.8% YoY to Rmb97mn. Its 1H22 results missed our expectations, due to the COVID-19 resurgence in China and weakening overseas demand.

In 1Q22, revenue rose 3.3% YoY to Rmb774mn, and attributable net profit increased 27.4% YoY to Rmb42mn. In 2Q22, revenue dropped 29.4% YoY to Rmb586mn, and attributable net profit increased 13.2% YoY to Rmb59mn.

Trends to watch

COVID-19 resurgence and weak overseas demand weigh on revenue; revenue of pedelec bikes and proprietary brands continues to increase rapidly. The firm's revenue declined 13.9% YoY in 1H22.

Traditional bikes: In 1H22, revenue of adults' bikes dropped 25.2% YoY to Rmb399mn, and revenue of children's bikes fell 33.3% YoY to Rmb204mn. Revenue of traditional bikes declined in 1H22, as: 1) the COVID-19 resurgence in several places in China hindered production and product delivery of Joy Kie; and 2) distributor inventories decreased slowly amid weak overseas demand.

Pedelec bikes: In 1H22, revenue of pedelec bikes jumped 99.2% YoY to Rmb257mn.

Improved business structure and forex push up net margin. In 1H22, the firm's gross margin (GM) declined 3.5ppt YoY to 13.1%, due to: 1) changes in accounting standards (starting to treat freight as cost in 1H22); and 2) increased raw material and ocean freight costs. In 1H22, the firm's selling, G&A, financial, and R&D expense ratios came in at 5.2% (-3.4ppt YoY), 1.1% (+0.3ppt YoY), -3.0% (-3.5ppt YoY), and 0.8% (+0.3ppt YoY). Its financial expenses declined thanks to forex. In 1H22, the firm's attributable net margin rose 2.05ppt YoY to 7.46%, due to decreased expense ratios.

We are upbeat on the firm's pedelec bikes and proprietary brands; watch demand and lower costs in the short term.

Pedelec bikes: The global pedelec bike industry is growing rapidly, and we expect the penetration rate of this product to rise notably going forward. We believe the firm has gained a first-mover advantage and distribution channel advantage. It now has ample orders on hand. Given its efforts to expand production capacity in China and abroad, we think its pedelec bike business will continue to grow rapidly.

Proprietary brands: Sales volume of children's bikes under the firm's proprietary brand exceeded that of many children's bikes sold on Amazon. Sales volume of pedelec bikes under its proprietary brand also increased rapidly. We think profitability of its proprietary brands will notably improve, as raw material prices and ocean freight rates are likely to decline. Short term, we suggest watching the recovery of overseas demand for traditional bikes and potential dips in costs.

Financials and valuation

We cut our revenue forecasts 23% to Rmb3.56bn for 2022 and 25% to Rmb4.32bn for 2023, and lower our EPS forecasts 8.6% to Rmb1.45 for 2022 and 12.4% to Rmb1.73 for 2023 to reflect the impact of the COVID-19 resurgence in China and weakening overseas demand. The stock is trading at 19x 2022e and 16x 2023e P/E. We maintain an OUTPERFORM rating, but cut our target price 15.2% to Rmb37.5 to reflect lower earnings forecasts and changes in overseas demand. Our TP implies 26x 2022e and 22x 2023e P/E, offering 36% upside.

Risks

Raw material prices and ocean freight rates fluctuate; downstream demand disappoints.