With net profit increasing by 30%, is Chervon reaching a turning point in performance and stock price decline?

Since its listing, Chervon Holdings, which has long been in a downward trend, seems to have reached a turning point towards an upward trend?

On July 16, Chervon Holdings (02285) announced that the company expects to record a net profit range of approximately 60 million to 65 million US dollars for the six months ended June 30, 2024, compared to a net profit of approximately 49 million US dollars for the six months ended June 30, 2023, representing a growth range of about 22% to 33%.

At the end of December 2021, Chervon Holdings successfully listed on the Hong Kong Stock Exchange. However, due to the performance bottleneck in 2022 and 2023, the company's stock price has more than halved from the issue price of 43 Hong Kong dollars over the past two years. Compared to the historical high of 71 Hong Kong dollars, the stock price is close to being "halved".

Now, with the disclosure of this positive performance news, Chervon Holdings' stock price seems to have finally shown signs of "rising": On July 17, the stock price opened significantly higher, rising by more than 16% at one point during the day, and finally closed up by 5.54% at 18.68 Hong Kong dollars; the next day, the stock price continued to rise, showing a strong upward trend during the day, and as of the time of writing, the stock price had risen by 5.03% to 19.62 Hong Kong dollars.

(Market data source: Futu)

So, the question is, can the upward trend in Chervon Holdings' stock price brought by this positive performance news continue? And where does this positive performance come from?

Strong growth in orders, garden machinery may usher in a replenishment cycle

It is reported that Chervon Holdings is a supplier of power tools and outdoor power equipment (OPE), focusing on innovation in lithium battery system technology. Established for more than 30 years, the company has evolved from early ODM business to building and acquiring 5 major proprietary brands, covering consumer-grade, industrial/professional-grade power tools, as well as high-end and mass-market OPE products, gradually maturing its product matrix. Currently, its proprietary brands include EGO, FLEX, SKIL, Devon, and Xtron, while the company also provides ODM services to leading companies such as Bosch.

Looking at the performance in recent years, Chervon Holdings' operating conditions can be described as "declining all the way to losses".

From 2021 to 2023, the company achieved revenues of 1.758 billion yuan, 1.989 billion yuan, and 1.375 billion yuan respectively, with year-on-year growth rates of approximately 46%, 13%, and -31%; achieving net profits attributable to shareholders of 145 million yuan, 139 million yuan, and -37 million yuan respectively, with year-on-year growth rates of approximately 226%, 4%, and -127%

(Data source: choice)

In 2023, Chervon Holdings went from profit to loss, mainly due to the conservative inventory policies adopted by its major customers in response to macroeconomic uncertainties, as well as additional provisions for inventory reduction and warranty.

It is worth noting that Chervon Holdings' performance turnaround in the first half of 2024 is related to the "customer proactive policies".

According to the company's financial report, the expected increase in net profit is mainly driven by the following factors: first, the increase in revenue due to strong terminal sales performance and increased customer order volume. This growth is attributed to the company's strong brand appeal, effective promotional activities, and favorable weather, which help stimulate end consumer demand and accelerate channel destocking cycles; second, the company has expanded its production scale and improved production efficiency, optimizing operating expenses in a balanced and efficient manner to drive positive momentum in profits.

From a deeper perspective, Chervon Holdings' ability to turn losses into profits this time may be somewhat related to the replenishment cycle in the landscaping machinery sector.

Affected by global inflation and destocking factors, the OPE industry in 2023, especially the lithium battery OPE sector, has faced pressure on performance for most companies, such as Greebo and Daye Shares, which both reported varying degrees of losses in 2023. However, it is important to note that from a long-term perspective, as the OPE industry recovers, leading companies represented by Chervon Holdings are expected to fully benefit from industry development dividends and seize significant growth opportunities.

For example, a Tianfeng Securities research report suggests that the main customers in the OPE commercial sector are landscaping companies, with a lithium battery substitution rate of less than 5% in the North American commercial sector in 2023. California's fuel ban is expected to further expand the development space for lithium battery OPE. Benefiting from the mature lithium battery industry in China, Chinese brands are expected to achieve overtaking in the curve along with the trend of OPE electrification.

According to TraQline statistics, in North America, the market share of lithium battery OPE has grown rapidly from 13% in 2010 to 36% in 2021. It is projected that by 2025, the lithium battery OPE market size will reach $5.6 billion, with a market penetration rate of 17.3%. This indicates that behind the long-term prospects of the lithium battery OPE industry lies substantial data support.

Industry landscape relatively concentrated, industry leaders also have "hidden concerns"

It is understood that the core technology of lithium battery OPE lies in the three-electric system (motor, electronic control, battery), with certain entry barriers. New energy landscaping machinery products powered by lithium batteries have a product structure consisting of working units (working heads), transmission units (brushless motors, controllers), and power units (battery packs, battery management systems, etc.). The battery pack, controller, and brushless motor constitute the power output and power transmission parts of new energy landscaping machinery, which are also key factors determining the performance of new energy landscaping machinery In general, it takes a certain amount of time from project initiation to research and development, to production. Therefore, new entrants need to invest a large amount of money and time to achieve the breakthrough of lithium battery technology from 0 to 1. Meanwhile, incumbent enterprises continue to invest in research and development to achieve technological and product iteration upgrades. Therefore, we believe that current leading companies have a first-mover advantage and can be the first to enjoy the benefits of lithium battery replacement demand.

According to the 2023 annual report materials publicly displayed by CHERVON, the sales volume of the EGO56V battery platform has reached 14 million units, ranking first in the industry's market share. The EGO brand has become the number one lithium battery OPE market share on Amazon and the number one lithium battery OPE market share in the United States. Among the 58 most popular gardening tools of the year, EGO has consistently ranked first in positive reviews 45 times.

This means that CHERVON, as an industry leader, obviously has a certain first-mover advantage and can be the first to enjoy the benefits of lithium battery replacement demand.

However, it is important to note that from a global perspective, the competition in the global electric OPE market is relatively concentrated, and the level of competition is also significant.

Frost & Sullivan data shows that based on revenue calculations, the top ten participants accounted for approximately 88.4% in 2020, with Chervon (20.4%) ranking first in market share, and CHERVON ranking second with a market share of 11.4%. Other domestic participants include Greebo, Daye Shares, Juxing Technology, Baoshide, while major overseas companies include Chervon, Toro, Husqvarna, and Stanley Black & Decker. Daye Shares' main product is fuel-powered lawnmowers, while Greebo's main product is new energy garden tools.

Due to competitive pressures, Zhitong Finance APP learned that before CHERVON went public, capacity expansion was a key focus for the company.

CHERVON previously disclosed in its prospectus that in 2020, the company's product design capacity was 12.89 million units, and the capacity utilization rate reached 94% in the same year. To alleviate capacity constraints, the company plans to build the Chervon Intelligent Manufacturing Industrial Park and the Chervon New Energy Industrial Park Phase II project. The Chervon Intelligent Manufacturing Industrial Park is expected to be put into use in 2024, increasing production capacity by 10.4 million units. The Chervon New Energy Industrial Park Phase II project is expected to be put into use in 2023, increasing the company's annual production capacity by approximately 12 million units.

To further consolidate the company's competitive advantage, enhancing research and development capabilities and expanding sales channels have become the main directions for improving performance.

In terms of product expansion, in 2023, the company continued to expand the OPE and power tool product ecosystem based on the battery platform. On one hand, the company is expanding the EGO brand to include high-pressure washers, dry/wet vacuum cleaners, and mini bicycles, strengthening user stickiness for the EGO 56V battery platform On the other hand, the company has expanded the application scope of more than 40 new products and the 24V platform at FLEX; in terms of channel expansion, the company has partnered with the well-known North American channel John Deere, and their strong alliance will further strengthen the EGO product capabilities and channel reach. Additionally, EGO has been expanding its sales and distribution network in Europe, achieving double-digit growth in 2023.

Overall, the performance of CHERVON benefited from external factors such as the replenishment cycle of garden machinery and the long-term visibility of the lithium battery OPE industry. However, as the industry leader, there are hidden concerns that need to be addressed in order to maintain a leading position in the industry. Enhancing research and development capabilities and expanding sales channels are essential for CHERVON to continue its leading edge. The company's ability to strengthen its "internal strength" will also determine whether its stock price can continue to rise