MARUBI BIOTECHNOLOGY(603983)：CHANNEL TRANSFORMATION WEIGHS ON RESULTS;WATCH FOR POSSIBLE IMPROVEMENT IN EARNINGS

2021 and 1Q22 results in line with our forecasts
Marubi Biotechnology (Marubi) announced 2021 results: Revenue rose 2.4% YoY to Rmb1.79bn and net profit attributable to shareholders declined 46.6% YoY to Rmb248mn, in line with our forecast; recurring net profit decreased 55.7% YoY to Rmb179mn. The firm recorded YoY revenue growth of 9.1% in 1Q21, 10.9% in 2Q21, -23.2% in 3Q21, and 6.8% in 4Q21, and a YoY decline in attributable net profit of 15.7%, 40.4%, 167.5%, and 16.2%, respectively. Marubi also announced that in 1Q22, its revenue declined 5.3% YoY to Rmb383mn and attributable net profit dropped 34.6% YoY to Rmb65mn, in line with our forecast; recurring net profit dropped 40.2% YoY to Rmb57mn. We attribute the sharp earnings decline in 2021 and 1Q22 to increased marketing investment, strategy adjustment for the development of new channels since 4Q21, and brand and product upgrading. We suggest watching the effects of its adjustment and transformation initiatives.
Trends to watch
Revenue under pressure; channel transformation underway.
Online distribution channels: In 2021, revenue grew 8.2% YoY to Rmb1.03bn, representing 60% of total revenue. Specifically, revenue from online self-operated stores grew 67% YoY, mainly thanks to the sales ramp-up in new channels such as Douyin and Kuaishou. However, the growth of revenue from livestreaming in Douyin and Kuaishou outpaced that of net profit. In 4Q21, the firm adjusted the structure of its influencer and self-operated livestreaming programs, which may fuel its online sales growth, in our view.
Brick-and-mortar distribution channels: In 2021, revenue declined 12% YoY, mainly due to the disappointing recovery of sales at cosmetic stores, a solid recovery of department stores, and a steady rise of beauty salons. To improve user experience and enhance consumer stickiness, the firm organized activities such as salons for members and exclusive events, and strengthened the training of sales employees at stores and business analysts. The repeat purchase rate of old members in brick-and-mortar distribution channels and department stores reached 55% and 62% in 2021. In terms of products, Marubi sorted out its SKUs and launched new product series. For online distribution channels, the firm focused on Xiaohongxie Essence and Xiaozidan series for young consumers. For brick-and-mortar distribution channels, it launched Jingzhi series for high-end consumer groups. In 2021, new products accounted for 30% of its total revenue.
Expenses increased due to investment in new distribution channels; profit margins fell YoY in 2021 and 1Q22. Marubi's gross margin (GM) dropped 2.2ppt YoY to 64% in 2021, and rose 2.8ppt YoY to 66.7% in 1Q22. In 2021 and 1Q22, its expense ratio rose 11.5ppt and 12.1ppt YoY. Selling expense ratio rose 9.2ppt and 8.4ppt YoY to 41.5% and 37.5%, mainly due to higher marketing expenses, payroll fees, and office expenses; G&A expense ratio rose 1.1ppt and 1.2ppt YoY. R&D expense ratio remained flat YoY in 2021 and rose 0.5ppt YoY in 1Q22. Financial expense ratio grew1.3ppt and 1.9ppt YoY in 2021 and 1Q22, mainly due to lower interest income from bank deposits and foreign exchange gains from short-term borrowings. In 2021 and 1Q22, the firm's net profit margin fell 12.7ppt and 7.7ppt YoY to 13.9% and 17.1%, and recurring net margin dropped 13.1ppt and 8.8ppt YoY to 10% and 15%.
Upgrading main brand; sales volume of sub-brands rising; watch for possible improvement in earnings.
Main brand: For online channels, Marubi increased the proportion of livestreaming e-commerce sales and improved the performance of self-operated stores. For brick-and-mortar distribution channels, it strengthened marketing efforts to boost sales and improve user experience. In terms of products, the firm rolled out different product series for each channel, reduced the number of SKUs, and increased R&D efforts to develop new products. In 4Q21, the firm launched 10 SKUs containing recombinant collagen. We suggest watching the sales of those new products.
Sub-brands: Passional Lover saw solid growth after brand upgrading. It launched a new foundation product in July 2021 and sales volume of the product reached 600,000 units in half a year. Thanks to effective expense control, the brand has already booked earnings. We expect Passional Lover to become a new growth engine for Marubi. In addition, the firm continues to improve user experience and supply chains. We expect Marubi to enhance its competitiveness in the medium and long term through digital transformation.
Financials and valuation
Considering the impact of the COVID-19 pandemic on consumer demand, and the firm's efforts to adjust distribution channels, we lower our 2022 and 2023 EPS forecasts by 5% and 5% to Rmb0.71 and Rmb0.82. The stock is trading at 30x 2022e and 26x 2023e P/E. We maintain an OUTPERFORM rating. Considering the worsening risk appetite of the market, we cut our target price 30% to Rmb28.4, implying 40x 2022e and 35x 2023e P/E, offering 32% upside.
Risks
Intensifying industry-wide competition; disappointing reforms for distribution channels; development of new products missing expectation.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。