BREO TECHNOLOGY(688793)：OFFLINE CUSTOMER TRAFFIC TO RECOVER;ONLINE SALES OF NEW PRODUCTS PERFORM STRONGLY-格隆汇

机构：中金公司
研究员：Aaron Wei HE/Junhao FAN/Yifei WEI/Rudi WEI/Lu LU/Jun CHU

　　What's new
　　Breo Technology held a global product launch event on May 31, 2022. We have monitored the recent sales performance of its new products. In this report, we provide a summary of our analysis.
　　Comments
　　New products help strengthen Breo’s positioning as a brand focusing on the combination of traditional Chinese medicine and modern technologies. At the launch event, Breo unveiled its Sport M0220 massage gun, a new product that features a small size and simple design. Compared with traditional massage guns, Breo’s products focus on the massage of acupoints and meridians based on the ancient practices of traditional Chinese medicine, and incorporate the warm compress function to improve user experience. In addition, Breo cooperated with Tongren Hospital to launch on May 12, 2022 the See 5R eye massager, which can help relieve dry eye symptoms. According to feigua.cn, sales volume of the See 5R eye massager reached 1,699 units in May, ranking No.3 among all Breo’s products. Sales value hit Rmb0.85mn (accounting for 14% of the brand’s total sales value in May), which we think shows that the See 5R series has the potential to become a blockbuster product.
　　Flexible online marketing channels; strong performance in the first round of sale promotions during the 618 shopping festival. Thanks to the product launch event and the positive influence of its official brand ambassador, XIAO Zhan, Breo performed strongly in the first round of sale promotions during this year’s 618 shopping festival. From 20:00 to 24:00 on May 31, 2022, Breo topped the bestselling massager lists on JD.com and Tmall. Notably, Breo See 5R eye massager ranked first on the bestselling eye massager lists on these two platforms.
　　In addition, the firm has started to strengthen its presence on Douyin since 2021. Data from feigua.cn shows that Breo ranked No.3 on Douyin’s bestselling massager list over January-May 2022. We expect Douyin to become an important growth driver for the firm. Breo’s livestreaming events on Douyin are primarily hosted by the brand owner, and the proportion of key opinion leader (KOL) livestreaming is relatively low. However, Breo’s view-through conversion rate is higher than that of SKG. In contrast, its rivals SKG and Philips mainly leverage KOL livestreaming to create blockbuster products to boost sales volume. The largest growth drivers of these two companies both contribute nearly 50% of their overall sales value.
　　Offline customer traffic to recover with the improvement of COVID-19 conditions. As of end-2021, Breo had 186 directly operated stores. Most of the stores were in airports, high-speed railway stations, and mid-range and high-end shopping malls in tier-1 and -2 cities. The COVID-19 resurgence in some regions of China has weighed on the firm’s offline channels and its overall profitability, in our view. With the resumption of work and production in Shanghai and the gradual recovery of offline customer traffic, we expect the firm’s profitability to improve markedly.
　　Financials and valuation
　　We leave our 2022 and 2023 net profit forecasts unchanged at Rmb120mn and Rmb163mn. The stock is trading at 33.4x 2022e and 24.6x 2023e P/E. We maintain an OUTPERFORM rating and our TP of Rmb79.28 (40.7x 2022e and 30.0x 2023e P/E), offering 22% upside.
　　Risks
　　COVID-19 resurgence in some regions of China; volatile market demand.