Gongniu Group _Core category sales deceleration in sight; downgrade to Neutral_

Gongniu Group Research Summary Company Overview - Gongniu Group is a leading brand in China's civil electrical industry, primarily involved in the production of sockets, switches, and LED lighting [10][11]. Key Industry Insights - Revenue Exposure: Gongniu has over 40% revenue exposure to the property sector, particularly through its core categories of sockets & switches and LED lighting [2][8]. - Residential GFA Completions: A significant decline in residential Gross Floor Area (GFA) completions is expected, with a projected decrease of 22% in H124 compared to a 17% increase in 2023. This decline is attributed to a 30-40% year-over-year drop in residential new starts since 2022, leading to a 2.5-year time lag in completions [2][12]. - Sales Growth Projections: Gongniu's socket & switch sales growth is projected at 7% in 2024, 0% in 2025, and 5% in 2026, a significant slowdown from a 16% CAGR in 2020-2023 [2][5]. Financial Performance and Projections - Earnings Growth: The projected EPS CAGR for Gongniu is expected to moderate to 8% for 2024-2026, down from 19% for 2020-2023 [1][5]. - Price Target Adjustment: The price target has been lowered from Rmb83.00 to Rmb64.50, reflecting anticipated sales slowdowns and margin contraction risks [5][19]. - Market Capitalization: As of September 19, 2024, Gongniu's market cap is approximately Rmb84.9 billion (US$12.0 billion) [4]. Margin and Pricing Risks - ASP Risks: There are potential risks to margins and average selling prices (ASPs) due to a consumption trade-down, as consumers increasingly prioritize "good value for money" [3][8]. - Consumer Behavior: The average furniture budgets of consumers have moderated since 2022, indicating a shift in purchasing behavior that may impact sales [3][8]. Strategic Insights - Category Expansion: Gongniu is expected to leverage its strengths in branding, product innovation, and channel expansion to fuel growth in new categories such as EV chargers and no-main lamps, which could contribute 13% of revenue by 2026, up from 4% in 2023 [7][19]. - Competitive Positioning: The company has gained market share from private brands through expanded product lines and channel strategies, particularly in lower-tier cities [3][7]. Valuation Metrics - PEG Ratio: Gongniu's PEG ratio is currently at 19x for 2024E PE, which is a premium compared to its historical average of 27x. This premium is justified by its improving return on equity (ROE) and higher payout ratio [1][19]. - Earnings Estimates: The earnings estimates for 2025E and 2026E have been reduced by 1% and 3%, respectively, primarily due to anticipated sales slowdowns in sockets and switches [5][19]. Conclusion - Gongniu Group faces significant challenges due to its exposure to the property market and declining residential completions, which are expected to impact its core sales categories. However, strategic category expansion and a focus on value-driven consumer preferences may provide avenues for growth despite the current headwinds. The downgrade to a Neutral rating reflects these mixed prospects [1][5][7].