2021 results miss our expectations

Shuhua Sports (Shuhua) announced its 2021 results: Revenue grew 5.3% YoY to Rmb1.56bn. Attributable net profit fell 15.5% to Rmb116mn.Recurring attributable net profit dropped 21.5% to Rmb102mn. In 4Q21, revenue declined 8.3% to Rmb473mn and attributable net profit decreased 39.6% to Rmb38mn. The firm’s 2021 results missed our expectations due to larger-than-expected increase in raw material prices and sea freight rates.

Trends to watch

Indoor fitness equipment and display shelves business growing　steadily. The firm’s revenue in 2021 grew 5.3% YoY. By business: 1) Indoor fitness equipment: Revenue from the indoor fitness equipment business rose 0.9% YoY to Rmb971mn, growing steadily despite the high bases of online business and exports in 2020. We attribute the revenue growth to the firm’s upgrades in its consumer distribution channels and ramp-up in its business with corporate clients. 2) Fitness trail equipment: In 2021, revenue from fitness trail equipment fell 9.1% YoY to Rmb242mn mainly due to fewer tenders from its government clients, in our view. 3) Display shelf: In 2021, the firm’s revenue from display shelves increased 35.9% to Rmb309mn, which we believe is mainly thanks to recovering downstream demand as the COVID-19 eased.

Costs weighing on profitability. In 2021, the firm’s GM edged down 2.2ppt YoY to 28.2%, with that of indoor fitness equipment down 3.5ppt to 27.0%. We mainly attribute the decline in GM to rising raw material prices and sea freight rates. In 2021, the firm’s expense ratio edged up 0.2ppt YoY to 17.4%, with sales and management expense ratios up 0.87ppt and 0.04ppt YoY and financial expense ratio down 0.71ppt YoY. R&D expense ratio remained flat YoY. The firm’s attributable net margin fell 1.8ppt YoY to 7.4% due to falling GM.

Promising outlook for sport sector; Shuhua likely to ride sector tailwind by leveraging its brand power and extensive distribution　channels. We estimate the size of China’s sport market at about Rmb3trn in 2021. The State Council released the National Fitness Plan (2021-2025) to promote the development of the sports industry. We expect the sports industry to continue to grow rapidly amid policy tailwind and people’s increasing health awareness. We believe that Shuhua boasts notable competitive advantages in both brand power and distribution channels. The　firm was a supplier for the 2022 Winter Olympics, which further enhanced its brand influence. It leads the sector in online and offline presence, with online expansion on platforms such as Douyin and offline stores being upgraded. Therefore, we see large upside in the firm’s market share. We　suggest watching the impacts of rising raw material price and sea freight rates on the firm’s profitability in the short term. In 2021, the　firm’s cost came under pressure due to upstream metal price hikes, which resulted in notable decrease in GM. In addition, rising sea freight rates and container shortage drove the firm’s export revenue and GM down 22% and 6.8ppt. We suggest keeping an eye on raw material prices and sea freight rates.

Financials and valuation

Considering larger-than-expected increase in raw material prices and sea　freight rates, we lower our 2022 EPS forecast 14% to Rmb0.39/sh and introduce our 2023 EPS forecast at Rmb0.46/sh. The stock is trading at　33x and 28x 2022e-2023e P/E. Considering our earnings forecast revisions and change of market’s appetite for risk, we cut our TP 30% to Rmb17.5 (45x 2022e and 38x 2023e P/E), offering 38% upside. Maintain　OUTPERFORM.

Risks

Sharp increase in raw material prices; intensifying competition.