A couple of weeks ago, Viomi Technology’s stock price closed at $5.53 per share, down 38.6% from the 2018 issue price, and down 65.1% from the highest price of $15.84 on April 30, 2019. Its total market value is only $384 million, which has fallen by more than half compared to the initial market value of approximately $629 million. Since entering the capital market for more than two years, Viomi’s ‘de-Xiaomization’ process has gradually accelerated, but the sequelae caused by this have also begun to appear.
De-Xiaomiization gradually loses high growth rate
Viaomi first became famous due to Xiaomi’s water purifier, and then expanded into the direction of ‘whole house smart home appliances’. In the past two years, as home appliances have become an important direction for the expansion of Xiaomi’s IoT business, as the company with the largest number of home appliances in the Xiaomi ecological chain company, Viomi Technology has become one of the main beneficiaries of the expansion of Xiaomi’s home appliances business.
The water purifiers, refrigerators, gas stoves, smoke stove sets, etc. currently on sale in Xiaomi Mall are all products of cooperation between Xiaomi and Viaomi. Even the Mijia brand sweeper and drag integrated machine launched by Xiaomi in August 2019 also comes from Viaomi, rather than the supplier Stone Technology that has been working with before. Relying on the support of Xiaomi channels and supply chain, coupled with the promotion of Viomi’s own brand product sales, the performance of Viaomi Technology has achieved rapid growth in the past few years.
Financial report data shows that from 2017 to 2019, Viaomi Technology achieved revenues of 873.2 billion yuan, 2.5612 billion yuan and 4.647.5 billion yuan, respectively, an increase of 179.4%, 193.3% and 81.5% year-on-year. By comparison, we can find that Viaomi Technology’s revenue has skyrocketed in recent years, but the growth rate has slowed down significantly. Especially the revenue growth rate in 2019 is less than half of the previous two years. In the third quarter of 2020, Viaomi Technology has achieved a revenue of 1.486 billion yuan, a year-on-year increase of 39%, and the growth rate has further slowed. The net profit of Viomi Technology in the quarter was 57 million yuan, compared with the same period last year was 84 million yuan, a year-on-year decline of 32.14%.
When it comes to the reasons for the decline in growth rate, in addition to the increasingly fierce market competition, it is inseparable from the complications caused by Viomi’s ‘de-Xiaomization’. In the past two years, we have seen that Xiaomi ecological chain companies, including Viomi, Huami, and Stone Technology, have gradually developed small scales and reached the stage of a dangerous process in the capital market.
From the perspective of Viomi, in order to reduce its dependence on Xiaomi channels, Viomi Technology has gradually reduced the proportion of its own brands in Xiaomi channels. From 2017 to 2019, the proportion of Viomi Technology’s sales of products to Xiaomi has dropped from 84.7% to 45.4%. Concomitantly, in the rising operating costs of expanding its own brand promotion, Viomi Technology’s gross profit margin began to continue to decline. From 2017 to 2019, the company’s gross profit margin was 31.5%, 28.0%, and 23.3%, respectively. By the third quarter of 2020, Viomi Technology’s gross profit margin was 17.1%, a decrease of 5.2 percentage points from the same period last year. If the low gross profit margin of Xiaomi hardware products can be supplemented by the high gross profit of Internet services, then in the absence of Internet services, the proportion of consumer products with higher gross profit margins is too low. Some analysts believe that its profits are under pressure will become the norm.
‘The decline of Viomi Technology’s gross profit margin is more related to Viomi’s current business strategy of expanding its categories.’ According to the analysis of China Securities Investment Corporation, VIomi Technology has vigorously expanded the SKU matrix to cover more usage scenarios and price ranges, and new products have lower gross profit margin because Viomi puts certain pressure on the overall gross profit margin. Based on this, CICC also lowered Viomi’s 2020 non-GAAP (American Accounting Standards) net profit forecast by 59% to 221 million yuan, which is 34% lower than Viomi’s 2019 non-GAAP net profit.
How does weak technology drive the 5G IoT banner?
It has become a common fact that the profit margin of the home appliance industry is not high. Compared with Chinese head appliance companies, Viomi Technology’s product premium ability is still in a weak position. By the third quarter of this year, Midea Group’s net profit margin has increased to about 10%, and Gree Electric’s net profit margin is also above 10%. However, the net profit margin of Viomi Technology in the third quarter was only 3.8%, which lags behind Midea, Gree and other home appliance companies.
‘Excessively low profit margins will cause the capital market to look down on the development prospects of this company, especially overseas investors.’ Some analysts in the home appliance industry said that overseas capital values most manufacturing companies for profit margins and weak profitability. If so, the capital market will not give a company too high valuation.
As far as Viomi is concerned, increasing income without increasing profits is only one of the complications caused by the process of ‘de-Xiaomization’. In order to seize users and compete for market share, high marketing expenses are also essential. According to Viomi’s third-quarter financial report data, VIomi’s overall operating expenses were 226.4 million yuan, an increase of 33.8% compared to 169.2 million yuan in the same period last year. Among them, sales and marketing expenses were 152.2 million yuan, a year-on-year increase of 34.2%, accounting for 10.2% of total revenue. In contrast, VIomi’s research and development expenses accounted for a relatively low proportion. The research and development expenses of Viomi in the quarter were 52.7 million yuan, accounting for only 3.6% of total revenue, which was far lower than marketing expenses. This development trend has been clearly reflected in Viomi’s financial reports in recent years.
From 2017 to 2019, Viomi Technology’s sales and marketing expenses were 95.296 million yuan, 379.6 million yuan, and 529.2 million yuan, respectively, accounting for 10.9%, 14.8% and 11.4% of operating income. In the same period, Viomi’s research and development expenses were 60.749 million yuan, 124.2 million, and 204.9 million yuan, accounting for 6.9%, 4.8% and 4.4% of operating income, respectively. The research and development expenses were reduced year by year, even less than one third of marketing expenses.
Viomi has always been positioned as a ‘whole-house Internet home appliance enterprise focusing on the R&D, manufacturing, and sales of smart home appliances’. Among the companies listed on the Science and Technology Innovation Board, R&D accounts for generally around 20% of revenue. As a technology company, Viomi’s R&D expenditures currently account for less than 5%. From this point of view alone, Viomi is not a technology-driven technology company. According to external sources, the R&D expenses have fallen sharply but sales expenses have fallen even more sharply. In the context of a straight upward trend, Viomi is more like an ‘Internet appliance manufacturer piled up by marketing, rather than technology-driven, good at telling stories and playing packaging’, which is obviously different from its stated corporate positioning.
When the R&D investment is ‘not enough’, product problems can be expected. Starting in 2018, media disclosed that some of Viomi’s home appliances have problems with worrying quality and poor smart functions. For example, the smart voice carried in its smart washing machine must be able to recognize the voice with a microphone, and there is a problem of low recognition rate. In addition, Viomi’s major appliances have repeatedly been exposed to quality problems such as uncooled refrigerators, loud washing machines, and high failure rates. In March last year, some users even posted articles, saying that one month after purchasing Viomi refrigerator and range hood, the refrigerator freezes and the connection between the Viomi refrigerator and the range hood has become unconnected from the initial interconnection control. Calling customer service has no result. Since smart technology is its core competitiveness, it is unable to establish a leading edge in intelligence, and hardware products have not built up barriers to competition like traditional home appliance companies. It is inevitable that the so-called Internet home appliances are more like marketing gimmicks.
In May last year, Viomi Technology launched its 5G IoT strategy and its new strategic product – 21Face interactive smart screen refrigerator. At the same time, it continued to enrich its product categories. In the second half of last year, it successively launched 5G IoT routers, 5G IoT super switches, 5G IoT large-screen refrigerators, and AI smart screens. New products such as washing machines, AI fresh-air-speed-drying fresh-air washing and drying all-in-one, build a ‘5G+IoT+AI’ matrix product portfolio, aiming to create a complete 5G IoT home intelligent ecology.
At present, China’s home appliance industry has entered a stock-led upgrade period. Under such a background situation, 5G, IoT, and artificial intelligence technologies are becoming more and more mature, and the industry’s existing market upgrade opportunities are coming. , It has indeed become a new driving force for the growth of the home appliance industry. In 2020, the intelligentization rate of household appliances and kitchen appliances will reach 28% and 25% respectively. Smart appliances will bring a cumulative market demand of 1.5 trillion yuan in the next 4-5 years.
In this field, traditional home appliance companies have also been transforming into technology-based groups. For example, Haier has been holding high the banner of smart home in recent years and has accelerated its transformation into an IoT ecological enterprise. Midea established the IoT business unit and formulated the strategic goal of ‘all-round digitalization and all-round intelligence’, and set the ambitious goal of covering 100 million households with smart home services within three years. In addition to traditional home appliance companies, Viomi’s former deep partner Xiaomi, which has come across the borders, has taken home appliances as an important direction for its IoT business expansion in the past two years. As of September 30, 2020, Xiaomi’s AIoT platform has connected IoT devices (excluding smartphones and notebook computers) the number reached 289 million units. Huawei, who is unwilling to let go of the huge cake of 5G Internet of Things, has accumulated more than 50 million users, accessed more than 100 categories, and covered more than 1,000 models since entering the field of smart home. The amount exceeds 150 million.
On the road to 5G IoT, these giants have sufficient funds and leading technology, as well as relatively complete services and after-sales systems, and have a certain user reserve. In contrast, there is no hardware support and no user accumulation. What is the odds of winning for Viomi, which has many categories with less research and development expenses?