Zepp Health Corporation

ZEPP Details

Zepp Health Corporation (NYSE: ZEPP) (formerly, Huami Corp.) is focused on connecting health with technology and has developed a platform of proprietary technology, which includes Artificial Intelligence (AI) chips, biometric sensors, and data algorithms, that drives a broadening line of smart health devices for consumers, and data analytics services for population health. The company is one of the largest global developers of smart wearable health and consumer fitness devices, with offices in China and the US. As of May 26, 2021, ZEPP’s market capitalization stood at USD 610.65 million, with 62.95 million American Depositary Shares (ADS) listed and outstanding (each ADS representing four Class A ordinary shares).

Q1FY21 Results: The company reported an uptick of 5.4% in total revenue to RMB 1.15 billion in Q1FY21 (ending March 31, 2021) compared to RMB 1.09 billion in Q1FY20, driven primarily by an 84.4% increase in the sale of its self-branded Amazfit and Zepp products (bands and smartwatches), which was partially offset by a 39.9% decrease in units of wearable products built for Xiaomi. However, it reported a net loss of RMB 40.56 million for Q1FY21, as compared to a net income of RMB 17.94 million in Q1FY20.

Key Risks: The company's most important customer, as well as a distribution channel, is Xiaomi Corporation, and any deterioration of their relationship or reduction of sales of Xiaomi wearable products (which comprised 69.0% of total revenue in FY20) could have a material adverse effect on ZEPP’s operating results. Further, prolonged frictions between the US and China, and the recent passage of a bill in the US that could lead to the delisting of some Chinese companies from the country’s exchanges (in case the US authorities are unable to satisfactorily audit the company for three consecutive years) expose the stock to significant political and regulatory risks. Though a solution to the standoff could be negotiated in the medium term (before the earliest possible delistings begin in 2024), the companies that might not be able to fulfill the revised standards are at risk.

Outlook: In its Q1FY21 earnings release, the company stated that it expects net revenue for Q2FY21 to range between RMB 1.7 billion and RMB 1.8 billion.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

ZEPP Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: ZEPP has declined by 41.49% in the past 3 months and is currently leaning towards the lower band of the 52-week range of USD 7.85 to USD 20.25. This is despite its endeavor to expand its business through initiatives such as recently partnering with Rouumtech to private label a customized Europa Portable X-ray System, together with its full product line, in China. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 11.63. On the technical chart, the next support level is USD 8.62. Considering the correction in the stock price in the past 3 months, increasing demand for smart health devices, significant growth potential, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 10.00, up by 3.09% as of May 26, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.