Firm estimated the firm’s 1H24 net profit grew 4.3-15.9% YoY

Mingyue Optical Lens announced that its attributable net profit for 1H24 is likely to grow approximately 4.3-15.9% YoY, reaching Rmb84-93mn. Recurring net profit is likely to increase by about 2.1-10.44% YoY to Rmb72-78mn. According to these figures, the firm's net profit attributable to shareholders in 2Q24 amounted to Rmb41mn to Rmb51mn, reflecting a YoY change of -8.3% to +12.3%. Recurring attributable net profit for the same period was Rmb37mn to Rmb43mn, with a YoY change of -7.6% to +7.0%. While the firm's results were in line with our expectations, earnings growth slowed, which we attribute to weak demand. Nevertheless, we expect that the firm will outperform the industry average.

Trends to watch

Weak industry demand. Retail sales of cultural and office supplies at companies above a designated size in China fell 5.8% YoY in 1H24, according to data from the National Bureau of Statistics (NBS). We expect demand in the lens industry to also come under pressure. Weak industry demand has slowed the firm’s earnings growth, but we anticipate that Mingyue will outperform the industry average and gain market share.

Competitive environment to improve. Competition in the lens industry has intensified since 2023 due to weak demand and the influx of new firms, particularly in the field of defocus lenses. The emergence of white- label products has pressured industry product prices. However, we believe that white-label products are less effective in myopia prevention and control, and will have only a small impact on leading brands such as Easy Control. The release of industry standards by the industry association should improve the competitive environment in the future. Data from Meritco shows that the ASP of optical glasses rose 12.2% YoY on Tmall, JD.com, and Douyin in 2Q24, with the growth rate increasing by 11.8ppt QoQ.

Mingyue continues to improve its product mix. We expect the firm's raw material and export businesses to come under pressure in 2Q24 due to weak industry demand. However, we anticipate that its Easy Control series and three major products in traditional lenses will maintain rapid growth, driving the firm to optimize its product mix and improve its　　profitability. On May 17, the firm presented a 24-month clinical report and seminar on Easy Control at Vision China 2024, an ophthalmology and optometry conference. Clinical data shows that the firm's Easy Control Pro product is 72% effective in delaying myopia progression in the second year and 61% effective in slowing axial growth, ranking it first in the industry. We believe the firm's defocus lenses are effective in myopia prevention and control and are cost-effective. We expect the firm to continue to gain market share and grow rapidly.

Financials and valuation

Given weak industry demand, we lower our 2024 and 2025 revenue forecasts 7.8% and 7.8% to Rmb824mn and Rmb997mn, and cut our net profit forecasts 7.3% and 8.3% to Rmb183mn and Rmb227mn. The stock is trading at 25x 2024e and 21x 2025e P/E. We maintain an OUTPERFORM rating and cut our TP 15% to Rmb34.80 based on our earnings forecast revisions, implying 38x 2024e and 31x 2025e P/E, offering 50% upside.

Risks

Intensifying competition; weaker-than-expected demand; changes in industry regulations.