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Price Performance (1-year)
*See important disclosures at the bottom of this report rating and risk definitions. All figures in US$ unless otherwise specified.
In Q1-2024, shipments were down 66% YoY to 1.2M units, 12% lower than our estimate
Source: FRC / Company
Self-branded unit shipments fell 60% YoY, amid no new product launches, and Zepp halting production of several low-margin products
This strategic move paid off as gross profit for self-branded units increased by 33% YoY, despite a 36% YoY decrease in revenue
Source: FRC / Company
Revenue was down 55% YoY, missing our estimate by 7%, due to lower unit sales, partially offset by higher than expected average product pricing
In line with industry standards, Zepp retains 70% of the retail prices of its products as revenue, while retailers and distributors keep the remaining 30%.
Zepp does not disclose segmented results:
The average price of self-branded units was up 61% YoY, driven by the introduction of new products, and terminating production of low-margin items
Source: Company, FRC
As a result, gross margins were up 21 pp to 37%, beating our estimate by 2 pp
Gross margins on self-branded units spiked 21 pp to 40%, exceeding the sector average of 24%, and progressing towards Apple's 45%. Zepp spent 27% of revenue on sales/marketing expenses, while Apple typically spends <5%
Operating expenses were down 14% YoY, and in line with our estimate. EBITDA and EPS remained negative, but improved despite lower revenue, due to higher gross margins
Working capital, and investments, net of long-term debt was RMB1.93B (US$266M) vs the current MCAP of just US$50M, implying that ZEPP is trading well below liquid assets
Zepp’s products (Amazfit) accounted for 2.8% of global smartwatch shipments in 2023
Source: FRC / IDC / Statista
It is estimated that global smartwatch shipments will increase by 9% p.a. in 2024 (Source: Statista)
Historically, Zepp's revenue growth rate has averaged 1.6x the global growth rate
As Q1 gross margins were higher than expected, we are raising our EBITDA and EPS estimates; we now anticipate EBITDA turning positive this year
As a result, our DCF valuation increased from $3.55 to $3.78/share
ZEPP remains the most undervalued stock on our list of comparables
Given the company’s negative enterprise value, its shares are trading at -0.08x forward revenue (previously -0.04x) vs the sector average of 2.24x (previously 2.02x)
Applying 2.24x to our 2024 revenue forecast for Zepp, we arrived at a comparables valuation of US$6.61/share (previously US$6.36/share)
We are reiterating our BUY rating, and adjusting our fair value estimate from US$4.96 to US$5.19/share (the average of our DCF and comparables valuations). We maintain our view that Zepp is an attractive acquisition target for larger players like Xiaomi. We believe the market has yet to recognize that shares are trading below liquid assets, and that EBITDA could turn positive this year.
We believe the company is exposed to the following key risks (not exhaustive):
