2021 and 1Q22 results in line with our forecast

Coco Healthcare Products (Coco Healthcare) announced its 2021 results: Revenue fell 27.4% YoY to Rmb1.19bn, and attributable net profit dropped 81.4% YoY to Rmb40mn or Rmb0.15 per share, in line with our expectations. By quarter, revenue rose 6.1% YoY in 1Q21, and decreased 38.7%, 45.5% and 20.4% YoY during 2-4Q21, while attributable net profit fell 15.0%, 67.7% and 94.3% YoY during 1-3Q21, and turned negative in 4Q21.

The firm also announced 1Q22 results: Revenue dropped 3.3% YoY to Rmb322mn, and attributable net profit dipped 95.1% YoY to Rmb1.96mn, mainly due to high raw material cost, high shipping rates and increased marketing expense.

Trends to watch

Strong demand for adult incontinence products; revenue contribution from proprietary brands up to 33%. By product, revenue from baby care products declined 34.8% YoY to Rmb612mn in 2021 due to insufficient shipping capacity for exports and shrinking newborn population in China. Revenue from adult incontinence products and pet sanitary products rose 8.1% and 13.9% YoY to Rmb464mn and Rmb88mn. By sales model, ODM revenue reached Rmb778mn (down 28% YoY excluding revenue from supplies used to combat the COVID-19 pandemic), and its proportion of total revenue dropped 6.3ppt YoY to 13.9%. Revenue from proprietary brands reached Rmb391mn (up 6% if excluding supplies used to combat pandemic), and its proportion of total revenue picked up 5.8ppt YoY to 33%.

Earnings pressure from cost increases and incremental spending on brand marketing. In 2021, gross margin declined 9.2ppt YoY to 18.6%, mainly due to falling revenue from high-gross margin products used to combat the COVID-19 pandemic, cost increase and shipping rate hikes. In 1Q22, gross margin fell 13.3ppt YoY and rose 4.5ppt QoQ to 12.1%. In the same quarter, overall expense ratio edged up 0.6ppt YoY to 10.8%, with selling expense ratio up 1.4ppt YoY (mainly due to YoY increase of marketing expense for proprietary brands), G&A expense ratio up 0.4ppt YoY, R&D expense ratio up 0.3ppt YoY, and financial expense ratio down 1.5ppt YoY. In 1Q22, attributable net profit tumbled 95.1% YoY to Rmb1.96mn, turning positive compared with 4Q21.

Watch progress of proprietary brand marketing and expansion into specialist channels. We believe Coco will continue to enhance its brand value by leading consumer education in the incontinence products market Its expansion into offline special channels since its listing has initially paid off, and we estimate online revenue grew over 25% YoY in 1Q22. The firm plans to strengthen online presence in 2022, and continue to expand into special channels, which we believe will help cement Coco’s market leadership.

Financials and valuation

Given the COVID-19 resurgence, we cut our 2022 and 2023 net profit forecasts by 26% and 12% to Rmb132mn and Rmb220mn. The stock is trading at 30x 2022e and 18x 2023e P/E. We maintain OUTPERFORM and cut TP by 19% to Rmb17.80 (mainly reflecting earnings forecast revisions), implying 37x 2022e and 22x 2023e P/E, offering 23% upside.

Risks

Volatile raw material cost; intensifying market competition; policy execution disappoints.