New Stocks Interpretation | Carrot: Price Reduction to Expand Market Highlights Hidden Inventory Concerns, Increasing Reliance on Overseas Online Channels "Aftereffects" Gradually Emerge.

In the first half of 2024, the household appliance sector continued its trend of high export growth and stable domestic sales. It can be seen that household appliance companies with strong export demand have performed well financially. Seizing the opportunity of the secondary market for household appliances to disclose their performance, Hangzhou-based Carote Ltd (referred to as "Carote" hereafter) went through a hearing at the Hong Kong Stock Exchange on August 30 of that year, intending to list on the main board of the Hong Kong Stock Exchange. The joint sponsors are BNP Paribas Securities and CMB International. According to the prospectus, Carote is a global kitchenware brand. Since the launch of the "Carote (CAROTE)" brand in 2016, Carote has established a significant presence in the online kitchenware sector in major markets such as China, the United States, Western Europe, Southeast Asia, and Japan, and has become one of the fastest-growing kitchenware brands globally. An analysis report by Zhoushi Consulting shows that based on 2023 retail sales, Carote ranks among the top five in the online cookware industry in major markets, ranking fourth in China, second in the United States, third in Western Europe, second in Southeast Asia, and third in Japan, with market shares of 1.2%, 13.1%, 1.3%, 8.6%,and 8.1% respectively. It is evident that the overseas market is Carote's "home base". Against the backdrop of the prosperous export market in the household appliance industry, Carote, rooted overseas, has naturally experienced smooth development. Annual revenue is close to 1.6 billion, with overseas markets accounting for 80% of sales The predecessor of Carote can be traced back to 1992 when Yongkang Tebao Electric Appliance Co., Ltd. was established, specializing in the production and manufacturing of non-stick cookware. In 2013, Carote shifted its focus from the previous OEM business to concentrate on developing ODM business, designing, developing, and supplying custom cookware and other kitchenware products for international brand owners and retailers. Leveraging the expertise gained from the ODM business and experience with customer preferences, Carote entered the online retail sector in 2016, launching its own kitchenware product brand, Carote (CAROTE). As of the last feasible date (June 5, 2024), its product portfolio includes over 2200 SKUs covering various kitchenware categories, including cookware, kitchen utensils, drinkware, etc. After missing the opportunity in the domestic e-commerce sector, Carote chose to embark on the path of going global. With e-commerce as a key strategy, the company collaborates with online platforms such as Tmall and JD in China, and internationally with Amazon, Walmart, Lotte, Qoo10, Shopee, Lazada, etc., establishing a rapidly expanding global sales network. As of the last feasible date, the company's online business has expanded to operate 48 self-operated online stores in 19 online markets across 19 regions. Thanks to the expansion of the global online channels, the company's performance has seen rapid growth. In the first three months from 2021 to 2024 (referred to as the reporting period), Carote's operating revenue was 675 million RMB, 769 million RMB, 1.583 billion RMB, and 503 million RMB respectively, with a compound annual growth rate of 53.11%; the corresponding net profits were 32 million RMB, 109 million RMB, 237 million RMB, and 89 million RMB respectively, with a compound annual growth rate of 173.14%. With both operating revenue and net profit showing high growth, Carote's strong growth trend is evident. In terms of business segments, the company's majority of revenue comes from the sales of its own brand kitchenware products, which contributes significantly to its overall operating performance. In 2021 to 2023, the revenue from the brand business was 283 million RMB, 531 million RMB, and 1.38 billion RMB, accounting for 41.9%, 69.1%, and 87.2% of total revenue, respectively; revenue from the ODM business was 392 million RMB, 238 million RMB, and 203 million RMB, accounting for 58.1%, 30.9%, and 12.8% of total revenue, respectively. In short, both in terms of business scale and revenue proportion, the brand business has become Carote's largest business. In terms of regions, the company's majority of total revenue comes from international business. During the reporting period, revenue from markets outside mainland China was 504 million RMB, 492 million RMB, and 1.256 billion RMB, accounting for 74.6%, 64.0%, and 79.3% of total revenue, with revenue from mainland China accounting for less than 30%, while overseas revenue accounts for nearly 80%. It is worth noting that with the growth of revenue from the brand business, Carote's gross profit margin has fluctuated significantly. During the reporting period, the gross profit margin of this business was 37.6%, 45.9%, 39.2%, and 45.1% respectively. Especially in 2023, the revenue from this business more than doubled, but the gross profit margin declined by nearly 7 percentage points. The company stated that this was mainly due to actively reducing the prices of certain products to attract more customers and maintain competitiveness. In the long run, what attracts consumers and investors the most is the company's innovation ability and core product competitiveness. Engaging in a price war may lead to continuous compression of the company's profit margins, which is not a sustainable strategy. Seizing the opportunity to go global, relying on online sales, "after-effects" gradually apparent Currently, going global is becoming the secret weapon for many companies to alleviate domestic competition pressure and find new growth curves. 2023 is considered a turning point for Chinese companies going global: the four "little dragons" of Chinese e-commerce are expanding against the trend, reshaping the overseas e-commerce landscape; electric vehicles, lithium batteries, and CECEP Solar Energy batteries have become the "new three items" for exports; consumer brands in industries such as catering, retail, electronics, and smart hardware are also going abroad to find growth points..."Rush abroad, make a big impact," has become the slogan for many Chinese companies. "In 2024, going global is a decisive opportunity." Reviewing this year's Two Sessions, many proposals and suggestions related to going global have emerged, including cross-border e-commerce, new energy going global, cultural exports, data crossing borders, and compliant going global, highlighting the importance placed on this area. Carote has taken the lead in seizing the high ground of going global in the midst of the kitchen appliance market. According to the analysis report from Zhoushi Consulting, it is expected that the global online kitchenware market size will reach 21.5 billion USD by 2027, with a compound annual growth rate of 8.3% from 2022 to 2027, indicating that Carote's growth potential is very broad. However, from OEM to creating its own brand, Carote has not placed a strong emphasis on research and development. Further details may be provided.Its core competitiveness seems to lie in competing for market share through price reduction and extensive online channel deployment.According to the understanding, the company mainly conducts brand business through online sales channels. Specifically, online sales channels have made significant contributions to brand business, accounting for 97.0%, 97.6%, 99.5%, and 97.1% of total brand business revenue during the reporting period. Within online channels, Karrot relies heavily on the Amazon platform. Revenue contribution from Amazon has been increasing, with the platform contributing nearly half of the brand revenue by the end of 2023. In its prospectus, Karrot also mentioned that if it cannot maintain cooperation with e-commerce platforms or continue to attract customers through these channels, the company's sales may significantly decrease, adversely impacting its business and financial performance. The high dependence on online sales has led to a continuous increase in Karrot's sales expenses, with platform commissions and marketing expenses accounting for over 90% of sales expenses. From 2021 to 2023, Karrot's sales expenses were 56.7 million yuan, 109 million yuan, and 245 million yuan, with sales expense ratios of 8.4%, 14.16%, and 15.5%; platform commission payments to e-commerce platforms reached 29.6 million yuan, 47.5 million yuan, and 167 million yuan, accounting for 52.1%, 43.7%, and 68.1% of current sales expenses, respectively. Marketing and advertising expenses for online sales maintenance and promotion were 23.1 million yuan, 53.1 million yuan, and 67.6 million yuan, accounting for 40.8%, 48.8%, and 27.5% of sales expenses. From 2021 to 2023, Karrot's research and development expenses were 18.1 million yuan, 20.8 million yuan, and 35.9 million yuan, with research and development expense ratios of 2.68%, 2.71%, and 2.27%. It is worth noting that Karrot's research and development expenses are much lower than marketing and advertising expenses. From 2021 to 2023, the company's research and development expenditures were 18.1 million yuan, 20.8 million yuan, and 35.9 million yuan, compared to the exponentially growing sales expenses each year, the growth in research and development expenses is not significant. More importantly, the revenue model mainly based on overseas and online sales has led to a continuous increase in Karrot's inventory levels, resulting in rising inventory costs and exacerbating sales costs. During the reporting period, the company's inventory levels were 30.5 million yuan, 42.2 million yuan, 108 million yuan, and 153 million yuan; inventory costs were 4.64 billion yuan, 3.93 billion yuan, 7.42 billion yuan, and 2.01 billion yuan, accounting for 84.5%, 79.7%, 72.9%, and 68.5% of total sales costs in the respective years. The large amount of inventory affects the liquidity of Karrot's goods, resulting in the inventory turnover rate decreasing from 17.5 days in 2021 to 32.3 days in the first three months of 2024. To attract more customers, maintain competitiveness, and reduce inventory, in 2023 Karrot lowered product prices to increase sales volume, causing its gross profit margin to decrease from 45.9% in 2022 to 39.2%. In summary, Karrot has achieved double-digit growth in revenue and net profit through the expansion of its overseas online channels. However, the side effects of high dependence on online channels are gradually becoming apparent. Without new sales channels, it may be difficult for Karrot to sustain high growth. Especially with the trend of going global, if the company does not have strong competitive barriers, its overseas market may also be further eroded.