Product Recall a Near-Term Negative for Vesync

We reduce Vesync’s 02148 fair value estimate to HKD 6.80 from HKD 7.90 after cutting 2022-24 earnings forecasts by 11%-19%, to factor in slower near-term growth on the back of the impact from its product (air fryers) recall and macroeconomic uncertainties. We view the recall as having a limited impact on the company’s reputation as it is addressing the issue quickly and there have not been any major accidents or injuries related to the use of their air fryers. Owners will receive a new product with the improved safety features. Although we think the shares are undervalued currently, the pending provision for the recall will likely cap share price performance in the near term. We remain positive on Vesync’s long-term outlook, supported by improving product mix, channel and geographical expansions, as well as new product pipelines.

Management is assessing the financial impact of the recall and will likely make a provision in the 2022 results, to be announced in March 2023. Meanwhile, Veysnc expects the impact on future sales should not be significant, given that consumers in North America are not new to product recalls. The firm believes that if the recall is handled professionally and promptly, customers will react positively, as it shows Vesync’s commitment to product safety. The firm also communicated with its sales channels, such as Amazon.com and Walmart, and has received support from them on the product recall.

We expect the product recall to temporarily affect Vesync’s sales growth in 2023-24, but our long-term growth assumptions are largely unchanged. We welcome the recall decision, as although it will cause a short-term cash outflow, it should help reduce the firm’s reputational risk and improve relations with the regulators. In addition, the cost of recall should be partly offset by compensation from its subcontractor. Given Vesync’s net cash position, we believe the firm has sufficient liquidity despite the product recall.