Cheerwin Group Ltd expects diversified development; China Merchants Securities's first coverage gives a "strongly recommended" rating

Cheerwin is a leading one-stop multi-category home care, pet care and personal care platform in China. The company insists on a multi-brand and multi-category layout, builds an omnichannel sales network, and continuously improves its product matrix. As the company continues to consolidate its leading position in the home care industry and actively lay out two major avenues of personal care and pet care, it is expected to usher in a high-speed growth period. China Merchants Securities gives Cheerwin a "strongly recommended" rating for the first coverage.

Cheerwin is actively developing various home care, pet care and personal care products with more diversified brands and categories, achieving simultaneous growth in revenue and gross profit. 2021 revenue of the company's main business is RMB 1,769 million, corresponding to a CAGR of 5.62% from 2017 to 2021; meanwhile, the company's annual gross profit is RMB 787 million in 2021, corresponding to a CAGR of 10.23% from 2017 to 2021.

Regarding profitability, Cheerwin's operating profit margin declined from 16.78% in 2020 to 4.7% in 2021, and the attributable profit margin declined from 12.86% in 2020 to 3.39% in 2021. The decline in profitability is mainly due to the rapid growth of sales expenses: from 2020 to 2021, the company's sales expense ratio increased from 21.86% to 29.75%, mainly due to the accelerated development of the pet business to capture market share; the management expense ratio increased from 4.97% to 10.12%, mainly due to the expansion of the team as a result of business development; the finance expense ratio decreased from 0.16% to 0.09%, mainly due to the decrease in the special loan for the prevention of COVID-19 outbreak in 2021.

Despite the continuous increase in raw material costs during 2020-2021 due to the impact of the epidemic, Cheerwin has continuously optimized its product mix and launched high-margin products through its vertically integrated and flexible supply chain that doesn't rely on single raw material, which has ensured an increase in gross profit level. Since 2017, the gross profit margin of all types of products of the company has steadily increased, and the gross profit margin of home care products, which account for over 90% of the company's main business, has risen from 36% to 43.9%.

Cheerwin's comprehensive gross margin was 43.4%/43.6%/44.5% in 2019-2021. The company's gross margin continues to optimize. One reason is due to changes in business and channel structure, the pet business with relatively high gross margin and the online channel revenue ratio continues to grow. Another reason is the company's continuous launch of new products for consumer upgrading in recent years, and new products usually have higher gross margins, driving the integrated gross margin up.

In the face of the uncertainty brought about by the impact of the epidemic, Cheerwin maintains a strong cash reserve, holding cash and cash equivalents of RMB2.558 billion as of December 31, 2021. The annual dividend payout ratio increased from approximately 25% for the year ending December 31, 2020 to approximately 80% for the year ending December 31, 2021. The company plans to continue its high dividend payout policy of over 80% next year to reward investors.