Vesync’s 2022 Net Loss Mainly Attributable to Impact of Voluntary Recall

We cut Vesync’s 02148 fair value estimate to HKD 6.10 from HKD 6.80 following its disappointing 2022 earnings. The 2022 net loss of USD 16.3 million (versus net profit of USD 41.6 million in 2021) was mainly attributable to the impact of the voluntary recall of its airfryers. We think the firm remains undervalued, but it will need to restore investors’ confidence after failing to meet expectations for two consecutive years, although this is partly due to external factors such as channels destocking and sharp rise in freight rates. We believe it will take time to prove Vesync’s capability and a strong recovery in the firm’s earnings should help to rerate the stock.

Excluding the impact of the voluntary recall, Vesync’s 2022 gross margin was relatively flat at 38.3%. With the recent significant drop in freight rates, we expect Vesync’s gross margin to increase to 41.0% in 2023. Nonetheless, the firm’s selling, distribution, and administrative expenses as a percentage of revenue increased to 32.4% in 2022 from 26.4% a year ago. This was mainly due to higher expenses on research and development, warehousing, marketing and advertising, and staff. These spending are essential to support the firm’s future growth, given the launch of new products and sales expansion in different countries and channels, in our view. We expect this ratio to normalize to 26.5% by 2027.

Going forward, we expect Vesync’s revenue growth to underpinned by geographical expansion, offline channels penetration, as well as product launches such as upgrade of current products and new categories like rice cookers and pressure cookers. Management believes the consumer spending in U.S. remains resilient and do not expect a significant slowdown. Our U.S. economist expects the country’s GDP growth to start bouncing back in mid-2024 as the Federal Reserve pivots to easing monetary policy and this should bode well for Vesync’s business.