VeSync Co., Ltd (“VeSync”) (HKG:2148) is a market player in the small home appliance online market in the United States (U.S.). According to Frost & Sullivan, the company is ranked third in terms of retail sales generated through Amazon and fifth through all online channels in 2019 in the U.S.
Shares of the Chinese company rose nearly 59.4% above its initial public offering (IPO) price of HK$8.8 marking a solid trading debut on the Hong Kong stock exchange on 18 December 2020. If you are looking at VeSync with interest, here are 10 things to know before you invest.
1. Business model
VeSync’s business principally focuses on online marketing and sales of self-designed and developed products. The company’s products are sold to users through its accounts in the U.S., Canada, the United Kingdom (U.K.), Germany, France, Spain, Italy and Japan, among others. Its core brands include “Levoit”, “Etekcity” and “Cosori”. The product life cycles for its key products are typically above two years. Set forth below is the revenue breakdown by brands for the periods indicated:
(Source: IPO prospectus)
2. Products overview
Levoit products are mainly home environment appliances with automation systems, including air purifiers, air humidifiers, essential oil diffusers and stick vacuum cleaners. The following pictures set forth some of the Levoit products.
Etekcity is VeSync’s first brand. Etekcity products are mainly smart home gadgets, outdoor recreation products, health monitoring devices and personal care products, such as smart fitness scales, smart WiFi outlets, smart LED dimmable light bulbs, digital laser infrared thermometers and smart nutrition scales. VeSyncs’ WiFi smart outlets under the Etekcity brand is compatible with Amazon Alexa and Google Assistant for voice control. The following pictures set forth some of its Etekcity products.
Products sold under Cosori brand are mainly kitchen appliances and dining ware, including air fryer, toaster oven, glass kettle and gooseneck kettle. VeSync’s Cosori Premium 5.8-Quart Air Fryer was awarded the Red Dot Award Design Concept by Red Dot Organization in 2019. The following pictures set forth some of its Cosori products.
The company’s VeSync app enables users to achieve centralized control of smart home devices for home automation experience. For its smart outlets and light bulbs, users can, through the VeSync app remotely, turn on and off, check power usage and adjust colour brightness. Meanwhile, for its smart weight scales, users can monitor personal health, such as body mass index, weight, body fat and muscles rate. For its air purifiers, users can monitor real-time air quality, and for its kitchen appliances and dining ware, users can check gourmet recipes. The company’s VeSync app can connect all its smart appliances under its various brands, and provide a scene-based control function.
3. Sales and distribution
VeSync sells products globally, and the U.S. is its largest market. Sale of products to the U.S. accounted for approximately 79.1% of its total revenue in 2019. The company also sells to other countries, including without limitation, Canada, the U.K., Germany, France, Spain, Italy and Japan.
VeSync has entered the Europe, Canada and Japan markets through its expanded cooperation with Amazon.com, Inc. (NASDAQ: AMZN) by following its geographic coverage expansion. It has also expanded to Vietnam, France and Germany through sales channel others than Amazon. The table below sets out a breakdown of the company’s revenue by geographic location for the periods indicated:
(Source: IPO prospectus)
VeSync sells products in the U.S. primarily through Amazon’s Seller Central and Vendor Central programs, and in other countries primarily through Amazon’s Seller Central program. In 2019, this represents 99.2% of total revenue.
Apart from Amazon, the company sells a small portion of its products through other channels, including chain retailers, other e-commerce marketplaces and its online shopping websites. The following table sets out the breakdown of its revenue by sales channels for the periods indicated:
(Source: IPO prospectus)
4. Relationship with Amazon
VeSync has cultivated its relationship with Amazon since its inception in 2011. The company sells its products primarily through Amazon’s Seller Central and Vendor Central programs.
Under Amazon’s Seller Central program, retail customers purchase products directly from VeSync through Amazon’s online marketplace, since 2011. Under the Seller Central program, VeSync sells products at retail prices to shoppers on Amazon’s online marketplace. At the same time, VeSync uses certain services offered by Amazon, such as platform services, fulfilment and warehouse services, etc.
Meanwhile, under the Vendor Central program, Amazon makes bulk purchase orders of the VeSync’s products and then sell them to its customer through its online marketplace under its account, since 2017. Under the Vendor Central program, VeSync sells products at bulk purchase price to Amazon. Historically, the overall average discounts and rebates offered to Amazon under the Vendor Central program, based on manufacturer suggested retail prices, were in the range of 30.0 – 40.0%. Generally, the company does not offer the same product for sale through both the Seller Central program and the Vendor Central program in the U.S. to avoid unnecessary competition.
In addition to the above, VeSync also procures services from Amazon. For instance, the company uses Amazon Web Services as its cloud computing service provider. It also utilizes Amazon’s advertising services to facilitate its sales through both Amazon’s Vendor Central and Seller Central programs.
VeSync believes its relationship with Amazon is mutually beneficial. Since the company provides high-quality and well-selling products, it trusts that Amazon will continue to be its major customer and sales channel and its relationship with Amazon will remain stable in the future.
However, investors should be aware that in the event the company’s relationship with Amazon deteriorates, or if there are any unfavourable changes in its relationship with Amazon, or if Amazon fails to maintain its market share or brand popularity, VeSync’s business operations may be materially and adversely affected.
5. Market size of U.S. smart home device market
Compared with countries which have just started to explore the monetization of smart home products, the smart home device market in the U.S. has shifted from a device-first towards a solutions-first approach, to provide high-end and comfortable integrated smart home solutions to consumers, which is not easily achieved by singular products.
The smart home device market in the U.S. experienced rapid growth at a CAGR of 19.6% between 2015 to 2019, increasing from approximately US$40.3 billion to approximately US$82.5 billion, accounting for approximately 39.5% of global market share in 2019. With the increasing adoption of integrated smart home solutions, the smart home device market in the U.S. is forecasted to reach approximately US$156.9 billion by 2024, yielding a CAGR of 15.2% between 2020 and 2024. The U.S. smart home device market is projected to account for approximately 50.0% of global market share in 2024. Such growth forecasts certainly bode well for VeSync.
(Source: IPO prospectus)
6. Competitive landscape and market position
As one of the world’s largest e-commerce platforms, Amazon attracts multiple leading smart home appliance retailers to conduct their online sales. In 2019, the top 5 small home appliance retailers generated approximately US$970.0 million through sales on Amazon. VeSync ranked at (all in 2019 in the U.S.):
- Third with a retail sales value of approximately US$190.0 million in terms of retail sales value generated through Amazon;
- Fifth in terms of retail sales value generated through e-commerce platforms;
- First in terms of the retail sales value of air purifiers through Amazon; and
- Second in terms of the retail sales value of air fryers through Amazon.
(Source: IPO prospectus)
7. How the IPO proceeds are used
VeSync intends to use the net proceeds raised of approximately HK$1.3 billion for the following purpose:
- Research and development of new products and upgrade and iteration of existing products (HK$399.0 million or 30.0% of net proceeds);
- Expand sales channels and geographic coverage, and enhancing brand awareness (HK$332.5 million or 25.0% of net proceeds);
- Continuously upgrade the VeSync app into a home IoT platform (HK$332.5 million or 25.0% of net proceeds);
- Developing smart solutions for business customers, including smart security solutions (HK$133.0 million or 10.0% of net proceeds); and
- General working capital (HK$133.0 million or 10.0% of net proceeds).
8. Sino-U.S. Trade War
Due to the Sino-U.S. trade war, some of VeSync’s products were subject to additional tariffs. The table below sets forth the list of its top-selling products which are subject to additional tariff:
(Source: IPO prospectus)
In response to the Sino-U.S. trade war, the company has adopted various measures aiming to minimize financial impact, including:
- Optimizing product mix. The company enhance its product development and marketing efforts on products with a higher profit margin. Further, it focused on launching new models and upgrades of these higher-margin products such as air purifiers and air fryers, which are its top-selling products.
- Increase the selling prices of some of its products. For example, its air purifiers have been subject to an additional 25% tariff since 8 July 2018. To mitigate the financial impact of such additional tariff, VeSync increased the U.S. selling prices of certain of its top-selling air purifiers primarily under the Vendor Central program in August 2018.
- Improving its operating efficiency. The company enhances its efforts on increasing the effectiveness of its online sales and marketing activities, thereby reducing its average marketing and advertising expenses.
- Expanding into markets outside the U.S. The company has been actively exploring markets outside the U.S. Amazon offers global selling channels, based on which the company has opened accounts in Canada, the U.K., Germany and Japan. It believes the diversification efforts will help mitigate the impact of the Sino-U.S. Trade War.
9. Substantial shareholders and senior management
VeSync’s largest shareholder is the Yang family with an approximate equity stake of 69.6% after the IPO. Three members of the Yang family sit on the board of the company, namely Ms. Yang Lin, Mr. Yang Hai and Mr. Yang Yuzheng.
Ms. Yang Lin (杨林), aged 47, is the founder, chairperson of the board and chief executive officer of VeSync. She is responsible for overall strategic planning and overseeing general management and daily operation of the company. Ms. Yang has more than 15 years of experience in the small home appliance and smart home device industry.
Before founding the company in 2006, from January 2005 to March 2007, Ms. Yang worked at Community CPA & Associates Inc. with the last position served as an office manager, where she was principally responsible for preparing financial statements and management proprietary report, tax filing and business consultation for business and individual clients. In anticipation of the business potential of small home appliances and electronic gadgets market, Ms. Yang first commences the trading business of small home appliances and electronic gadgets through establishing L&H Y US in the United States in October 2006.
Mr. Yang Hai (杨海), aged 45, is an executive director and vice president of the company. He is the brother of Ms. Yang Lin. Mr. Yang Hai is principally responsible for overseeing sales, marketing and online operation of VeSync, and has more than 17 years of experience in the communication technology industry.
Prior to joining the company in 2011 from June 2003 to September 2006, Mr. Yang Hai worked as a software engineer at Asiainfo Technologies (China) Inc., where he was principally responsible for billing system development. From September 2006 to June 2011, he worked at Ericsson (China) Communications Co., Ltd as a software engineer responsible for gateway server development. In December 2011, Mr. Yang Hai joined the company and has since served as its vice president.
Mr. Yang Yuzheng (杨毓正), aged 77, is a non-executive director, and is principally responsible for providing advice on the management of the company. Mr. Yang Yuzheng is the father of Ms. Yang Lin and Mr. Yang Hai. Mr. Yang Yuzheng has been retired since April 1999. Prior to his retirement, he had worked as a public servant in a number of government authorities.
10. Financial Highlights
|Years ended December 31,||Six months ended June 30,|
|Profit after income tax||1,867||4,361||6,372||1,980||22,481|
|Gross profit margin (%)||40.7||38.5||39.1||38.8||47.8|
|Net profit margin (%)||2.2||3.0||3.7||2.6||17.4|
|Return on total assets (%)||4.8||8.3||7.2||N/A||N/A|
|Return on equity (%)||36.2||52.1||38.9||N/A||N/A|
|Interest coverage (times)||5.9||6.7||6.4||N/A||N/A|
|As of 31 December||As at 30 June|
|Gearing ratio (%)||214.1||205.9||162.6||N/A||52.9|
|Current ratio (times)||1.2||1.1||1.2||N/A||1.6|
|Quick ratio (times)||0.4||0.5||0.7||N/A||0.9|
(Source: IPO prospectus)
VeSync has demonstrated growth and improving financials.
- Revenue has grown quickly from US$85.2 million in 2017 to US$171.9 million in 2019, this represents a compounded annual growth rate (CAGR) of 42.0%. Separately, profit after income tax has exploded from US$1.9 million in 2017 to US$6.4 million in 2019, representing a CAGR of 84.7%!
- Gross profit margins have been increasing steadily to 47.8% for the six months ended 30 June 2020. By contrast, net profit margins have jumped significantly to 17.4% for the six months ended 30 June 2020. That was primarily due to (i) higher proportion of sales from the company’s home-appliances-related categories such as home environment appliances, kitchen appliances and dining ware and health monitoring devices in its product mix, which were its most profitable categories; and (ii) a lower rate of increase in selling and distribution expenses and administrative expenses due to less promotional activities held in the first half of 2020 and economies of scale for its fixed costs.
- The company should not have any liquidity issues since its gearing ratio has been reduced significantly from 214.1% in 2017 to 52.9% as of 30 June 2020. Its current and cash ratios are also at healthy levels of 1.6x and 0.9x as of 30 June 2020.
- VeSync’s return on equity of 38.9% and return on assets of 7.2% achieved in 2019 are decent and demonstrate proper capital allocation by management. There is no mention of a dividend policy in its IPO prospectus.
11. Current valuation
With a closing share price of HK$13.28 as at 14 January 2021, VeSync is trading at a price to earnings (PE) ratio of 71.6, with a market capitalization close to HK$15.5 billion. The company has a simple to understand business and its growth prospects are indeed eye-catching. But investors would need to be mindful of its heavy reliance on Amazon and impacts from the Sino-U.S. Trade War, and weigh such risks alongside its relatively high valuation before considering an investment.
(Source: Google Finance)