BREO TECHNOLOGY(688793):OFFLINE STORES FOCUS ON USER EXPERIENCE;ONLINE CHANNELS A KEY GROWTH DRIVER

类别:公司 机构:中国国际金融股份有限公司 研究员:Aaron Wei HE/Junhao FAN/Rudi WEI/Yifei WEI/Jun CHU 日期:2021-11-05

Investment positives

    We initiate coverage of Breo Technology (Breo) with an OUTPERFORM rating and a target price of Rmb132.75, corresponding to 45.0x 2022E P/E.

    Why an OUTPERFORM rating  

    Ample upside potential in market for small massage products.

    1) While China is a major manufacturing hub for massage products, its consumer market for massage products is still in its infancy. In 2019, the size of China’s massage products market was about Rmb13.9bn, and that of the small massage products market was approximately Rmb7.5bn. 2) Against the backdrop of a gradual integration of massage culture in East Asia and fitness culture in western countries in the third era of consumption in China1, we expect the overall scale of China's massage appliance and training and fitness equipment market to reach approximately Rmb80bn in the long term. 3) Small massage products are compact and free of installation with low ASP. They show similar characteristics as small household appliances, and are suitable for online marketing. We believe continuous launch of novel products and adoption of the new online marketing strategy will stimulate consumers’ impulse purchases, opening up room for growth.

    A leading name in high-end small physical massage products segment. 1) Breo Technology targets the high-end market to avoid the fiercely competitive low-end market. 2) Compared to its main rival SKG, Breo’s product portfolio is more balanced, and it adopts physical massage technology to seek competitive differentiation from SKG's flagship pulse massage products. Physical massage does not cause a tingling sensation and has been readily accepted by the public. We think physical massage will eventually become mainstream in the industry. 3) Breo attaches great importance to product R&D and technological innovation, which lays a foundation for the company’s high-end strategy. For example, the iSeeK eye massager leads the market in adopting the audio resonance technology, and the company has launched an innovative product Jiangxiaozhu A1 moxibustion box.

    Offline stores focus on user experience and bring unique advantages; online channels a key growth driver. 1) Breo’s online sales posted strong growth in recent years, becoming a key driver of the company’s revenue growth. 2) Since 2020, the company has ramped up its investment in new online marketing. For example, Breo has appointed Mr.XIAO Zhan as the company’s official brand ambassador, and has sponsored the TV show Back To Field 4. 3) The company has continued to expand its offline store network. The company had 178 directly-operated stores as at the end of June 2021, and it plans to continue increasing this number. The company's offline stores target the high-end market, and are mainly located in airports, high-speed rail stations and mid-range to high-end shopping malls in first- and second-tier cities. 4) Offline stores focus on promoting new products, increasing brand exposure and marketing products with higher ASP to support the company’s product premiums and high-end brand images with high-quality service experience. We believe this gives the company an important competitive advantage over small massage product brands with no offline stores.

    How do we differ from the market  The market has concerns about the company’s elevated selling expenses. However, we believe that the high selling expenses are attributable to its business model focusing on directly-operated stores and increasing efforts in brand building. We think such expenses are necessary and could help the company cement its unique competitive advantage, giving impetus to its long-term growth.

    Potential catalysts: Expansion of offline stores and continuous growth of online sales driven by new marketing strategy.

    Valuation and recommendation

    Our EPS forecasts are Rmb1.78 for 2021, Rmb2.95 for 2022 and Rmb4.21 for 2023, corresponding to a CAGR of 53.9%. We initiate coverage on the company with an OUTPERFORM rating and a TP of Rmb132.75, offering 43% upside and implying 45.0x 2022e and 31.5x 2023e P/E. The stock is trading at 31.5x 2022e and 22.1x 2023e P/E.

    Risks

    Weaker-than-expected market demand; intensified market competition; disappointing expansion of directly-operated stores and store management; disappointing product R&D.