1Q22 results in line with our forecast

Shuhua Sports announced its 1Q22 results: Revenue fell 13.7% YoY to Rmb278mn, net profit rose 4.3% YoY to Rmb13mn, and recurring net profit dropped 12.2% YoY to Rmb11mn, in line with our forecast.

Trends to watch

Revenue growth slowed. In 1Q22, revenue fell 13.7% YoY, slower than that the growth in 4Q21. We attribute this to the following factors: 1) Domestic revenue was dampened by weak demand and logistics disruption caused by the COVID-19 pandemic. 2) Export business was negatively affected by the tight shipping capacity and a gradual resumption of competitors’ overseas production capacity.

Profitability improved YoY. In 1Q22, gross margin increased 3.0ppt YoY to 29.0%, despite a sharp rise in prices of raw materials such as steel. We attribute this to an improving business structure. Expense ratio increased 3.7ppt YoY to 21.8%, with selling, administrative, financial and R&D expense ratios up 1.8ppt, 1.2ppt, 0.1ppt and 0.6ppt YoY to 10.0%, 8.9%, 0.04% and 2.9%. Net margin expanded 0.8ppt YoY to 4.8% thanks to increase in gross margin and the contribution of other income and investment returns.

Watch the implementation of domestic stimulus policies on the fitness sports industry and Shuhua’s offline channel upgrading:

Policy: Since 2H21, the State Council and several government ministries and commissions have released documents such as the National Fitness Plan (2021-2025) and the Opinions on Building a Higher-level Public Service System for National Fitness. We believe these policies will drive healthy and sustainable development of the sports industry. As a leading domestic fitness equipment brand, Shuhua enjoys notable competitive advantages in brand, channel and product. The company’s indoor and outdoor fitness equipment may benefit from the robust momentum of the sports industry, in our view.

Channel upgrading: Shuhua has the largest offline fitness equipment store in China, and has established a national marketing network. In the recent years, Shuhua has continued to upgrade stores, creating a sports experience space integrating sales, experience and guidance. In addition, the company continues to improve the intelligentization and digitalization of its products and stores. We suggest investors pay attention to the improvement of store efficiency through channel upgrading.

Financials and valuation

We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 27x 2022e and 23x 2023e P/E. To reflect the change of market appetite for risk, we cut our TP 11% to Rmb15.5 (40x 2022e and 34x 2023e P/E), offering 46% upside.

Risks

Sharp increase in raw material prices; intensifying competition; demand volatility amid the COVID-19 pandemic.