ZHEJIANG NATURAL OUTDOOR GOODS(605080)：1H22 NET PROFIT UP 26.9% YOY;DOMESTIC SALES STRONG

　　1H22 results in line with our expectations
Zhejiang Natural Outdoor Goods Inc (ZNOG) announced its 1H22 results: Revenue grew 28.4% YoY to Rmb636mn, attributable net profit rose 26.9% YoY to Rmb174mn, and recurring attributable net profit increased 24.3% YoY to Rmb164mn. The firm’s 1H22 results are in line with our expectations.
　　By quarter, revenue climbed 46.6% YoY to Rmb330mn in 1Q22, and 13.2% YoY to Rmb306mn in 2Q22. Attributable net profit rose 37.8% YoY to Rmb85mn in 1Q22, and 18.0% YoY to Rmb89mn in 2Q22.
　　Trends to watch
　　Revenue growth strong in domestic market on booming sales of mattresses and new categories. In 1H22, ZNOG’s revenue grew 28.4% YoY. Inflatable mattresses: Revenue rose 28.1% YoY to Rmb457mn in 1H22. We believe strong demand and rising proportion of thermoplastic polyurethanes (TPU)-made products pushed up the sales volume and ASP of the firm’s inflatable mattresses. Headrests and seat cushions: Revenue jumped 51.8% YoY to Rmb47mn in 1H22 driven by recovery in overseas travel. Others: In 1H22, we note that the firm’s waterproof and insulated thermal bag businesses posted solid growth, with the revenue from its other businesses totaling at Rmb132mn (+22.7% YoY). By region, the firm’s sales in the domestic market reported strong performance in 1H22, growing 55.4% YoY to Rmb140mn, while revenue from overseas sales rose 22.4% YoY to Rmb496mn.
　　Profitability remained high. In 1H22, ZNOG’s gross margin (GM) fell 4.9ppt YoY to 35.9%, mainly because the firm’s product mix optimization and forex rate changes were unable to offset the impact of rising costs (e.g., raw materials, labor and logistics), in our view. In 1H22, selling, G&A, and financial expense ratios fell 1.30ppt, 0.04ppt and 2.44ppt YoY to 1.2%, 3.9%, and -2.8%, while R&D expense ratio rose 0.15 ppt YoY to 2.3%. Despite a YoY decline in its GM, the firm’s net profit margin edged down only 0.3ppt YoY to 27.4% in 1H22, mainly due to effective expense control and government subsidies. We believe the firm still outperformed its industry peers in profitability in 1H22.
　　Business expansion drives rapid revenue growth; extension along the value chain to push up profitability. Revenue: Global popularity of outdoor activities has been gaining steam in recent years, particularly in emerging markets including within Asia. ZNOG has maintained a solid lead in TPU-made inflatable mattress market, and continues to grow rapidly on the back of collaborations with major customers (e.g., Decathlon) and new client acquisition. By leveraging its strong design and R&D capabilities, the firm has continued to create new product categories, such as waterproof, insulated thermal bags, and stand-up paddles (SUP). Revenue of these new categories has increased rapidly, serving as the firm’s new growth drivers. Profit: ZNOG has extensive experience in the TPU industry, and is expanding into upstream segments along the value chain. The firm now covers all the key processes, including composite fabric production, as well as product design, R&D and manufacturing. We believe the firm’s strong presence along the entire value chain helps strengthen its product quality and delivery. Coupled with the firm’s steady advancement in manufacturing automation, we expect this to allow it to sustain above-peer profitability. We suggest watching near-term changes in costs and overseas demand.
　　Financials and valuation
　　We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 23x 2022e and 18x 2023e P/E. We maintain an OUTPERFORM rating and TP at Rmb77.00, implying 28x 2022e and 22x 2023e P/E and offering 20% upside.
　　Risks
　　Volatile raw material prices; demand weakening due to resurgence of COVID-19; international trade policy headwinds.
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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。