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With a surge of 115%, a plunge of 20%, followed by another surge of 15.2% in just three trading days since its listing, Ugreen's share price has been nothing short of exhilarating.

Since Ugreen (SZ: 301606) submitted its prospectus, controversies surrounding the company have persisted. For instance, its R&D capabilities appear vague; although the company meets the requirements for listing on the ChiNext board, 49.25% of its R&D personnel hold a junior college degree or lower, nearly half of the total. Additionally, the company primarily relies on external contract manufacturing (i.e., OEM mode), and its number of invention and utility model patents is not substantial.

To be fair, a hero's background is irrelevant; junior college graduates can excel in R&D too. Two of the company's core technical leaders are junior college graduates, and they have still managed to grow the company to its current scale. The number of patents and whether products are self-manufactured hardly constitute the core basis for bearish sentiment towards the company. After all, as a consumer electronics enterprise, strong sales speak louder than words, and in this regard, Ugreen's performance is not poor.

However, even if these bearish views are unfounded, we still do not consider Ugreen an attractive investment. With a current market capitalization exceeding 17.4 billion yuan and a P/E ratio of 43.9, Ugreen's valuation is still relatively high compared to similar A-share companies like Bull Group (SH: 603195) with a P/E ratio of 23.6 and Anker Innovations (SZ: 300866) with a P/E ratio of 16.7. Considering the performance of these two peer companies over the past six months, Ugreen may still undergo a further correction.

Moreover, as Ugreen's largest institutional shareholder, Hillhouse Capital (holding 9.37% of shares) has been criticized by many investors for illegal share reductions in the A-share market. Whether it can serve as "patient capital" supporting listed companies remains to be seen. As a rational investor, the most pressing consideration should be whether the company's growth potential aligns with its current branding.

01 "Pigs on the Wind"

At first glance, Ugreen's financial reports might lead one to believe it's a growing enterprise: revenues over the past three years were 3.446 billion yuan, 3.839 billion yuan, and 4.803 billion yuan, respectively, showing impressive growth. For the first half of this year, the company expects revenues of 2.66 to 2.77 billion yuan, representing a year-on-year growth rate of 25.2% to 30.6%.

However, Ugreen's performance is partly attributed to Apple. In other words, a "butterfly flap" by a tech giant like Apple can trigger significant waves in the consumer electronics accessories industry, fostering new high-growth products.

Steve Jobs and the first-generation iPhone

The first "flap" was the launch of the iPhone in 2007. Its large touchscreen defined the shape of modern smartphones, but due to the physical limitations of lithium batteries, power banks became essential consumer electronics for every smartphone user. To this day, products serving the battery replenishment scene remain prominent in the accessories industry.

The second "flap" dates back to 2015 when Apple introduced the Type-C interface in its computer lineup, gradually phasing out other transmission interfaces. This change, along with other major laptop manufacturers, led the trend towards thinner, more powerful PCs with integrated interfaces, driving rapid growth in accessories like docking stations.

The third "flap" occurred in 2016 when Apple removed the 3.5mm headphone jack from its phones and launched the game-changing true wireless earbuds (TWS) product, AirPods, initiating a new audio product category and once again transforming smartphone form factors. Of course, the high price of AirPods left ample market space for third-party manufacturers.

The most recent change was in September 2020, when Apple, citing environmental concerns, removed chargers and cables from iPhone 12 boxes. Also, that year, Apple introduced MagSafe magnetic charging on its phones, significantly expanding the form and function of wireless charging products.

These four changes spanning 17 years fueled growth in three major accessories sectors in the consumer electronics field: charging and energy replenishment, audio-video, and data transmission. These sectors correspond to Ugreen's three main revenue streams: transmission products (30.1%), audio-video products (19.8%), and charging products (32.4%), which collectively accounted for 82.3% of revenues in 2023.

The growth trends of these three revenue sources also reveal the significant impact of tech giants' product strategy adjustments on companies like Ugreen. The most recent adjustment by Apple, removing chargers and introducing MagSafe in September 2020, has seen charging devices overtake other product categories as Ugreen's fastest-growing business segment.

In 2021, charging products contributed only 790 million yuan in revenue, accounting for 22.9% of total revenue and ranking third among Ugreen's income sources. By 2023, this category accounted for 32.4% of revenue, generating 1.55 billion yuan, with two-year growth rates of 23% and 57%, respectively, making it Ugreen's largest revenue source. Clearly, as one of the longest-standing demands for smartphones, the rapid growth in this category is inseparable from Apple's strategy adjustments in phone charging.

This trend is consistent across similar companies. According to Anker Innovations' 2023 financial report, charging products also represent the largest share of its revenue, generating 8.6 billion yuan in 2023, up over 25% year-on-year, second only to wireless audio at 33%. Considering Anker's substantial revenue base, achieving such growth underscores the significant influence of tech giants' product adjustments on accessory manufacturers.

Of course, both smartphones and laptops are trending towards thinner form factors and enhanced performance, necessitating the relinquishment of some interfaces and functions, which accessories then fill. Considering this trend, third-party accessories will continue to grow and potentially expand into new categories to meet diverse needs.

However, if a company's growth is solely dependent on how tech giants behave, it essentially forfeits the possibility of developing its product ecosystem as a consumer electronics enterprise. For example, would you choose a company's wireless earbuds just because their power bank is good? Or vice versa?

The likelihood is low. The inability to form an ecosystem makes it difficult for consumer electronics enterprises to achieve rolling growth across product lines. Moreover, the severe homogenization of accessories from different brands, without ecosystem support, hinders the development of true differentiated competitiveness and, subsequently, brand power.

For consumer electronics enterprises, ecosystems and brands are the sources of profit and growth.

02 Doubtful Profit Margins

Frankly, even though the market size of consumer electronics accessories depends on tech giants' product strategies, it remains a promising market. Furthermore, as Chinese e-commerce seeks overseas expansion, these accessories also have significant growth potential abroad.

Take Ugreen as an example; its overseas sales over the past three years were 1.59 billion yuan, 1.72 billion yuan, and 2.42 billion yuan, respectively, increasing its overseas revenue share from 46.1% in 2021 to 50.4% in 2023. Overseas expansion has become a significant contributor to its revenue, justifying its classification as a growing enterprise.

However, the question is whether its currently weak profitability can improve alongside market expansion.

In 2023, Ugreen achieved a net profit attributable to shareholders of 390 million yuan, up 18.7% year-on-year, with an 8% net profit margin that remained largely unchanged over the past three years. Additionally, its gross margin was 37.21%, 37.38%, and 37.6% over the same period, within the industry's range but with insignificant growth.

In the first quarter of this year, the company's revenue reached 1.28 billion yuan, up 27.1% year-on-year, with a net profit attributable to shareholders of 102 million yuan, up 10.44% year-on-year. This calculation yields a net profit margin of 8%, showing no improvement; the gross margin increased slightly from 37.6% in 2023 to 39.6%, but the change was insignificant.

The situation seems to be deteriorating further in the first half of this year. According to the company's prospectus, its expected net profit margin for the first half is between 6.9% and 7.6%, lower than in the past three years and the first quarter. For three consecutive years, including the first half of this year, the company's revenue growth rates have significantly outpaced those of its net profit, indicating a problematic trend.

Moreover, due to the high proportion of accounts receivable and prepayments to revenue, the company's operating cash inflows over the past three years were 150 million yuan, 450 million yuan, and 170 million yuan, respectively, lower than net profits in all years except 2022. This indicates a weak ability to generate cash flows from its primary business, reflecting underwhelming profitability and cash flow levels.

The ultimate goal of overseas expansion should not only be to increase revenue but also profitability. If the net profit margin remains at 8% post-expansion, the endeavor would seem futile.

Theoretically, the rapid growth of overseas business should effectively improve a company's gross margin and profitability. Take Miniso, a daily commodity retailer, as an example. It has also expanded aggressively overseas in recent years, with its gross margin rising from 33% in 2022 to 38% in 2023 and 43.4% in the first quarter of this year. Its net profit margin reached 15.7% in the first quarter of this year, demonstrating strong profitability through overseas expansion.

Comparing the two, both companies have expanded from domestic competition to overseas markets, with overseas revenue shares rising consistently in recent years. Even Ugreen's annual overseas revenue share is higher than Miniso's, yet their profitability outcomes are vastly different.

Behind this contrast, it's hard to argue that small commodities inherently have higher profit margins than electronic accessories. The nature of the products alone cannot explain such a significant margin gap. Moreover, Ugreen's overseas expansion is primarily through online channels, unlike Miniso, which operates physical stores overseas. There's no reason for such a significant difference.

Perhaps the reasons lie in aspects such as the company's management capabilities and weak brand power. Regardless of the dominant factor, without clear changes, it will be challenging to reverse the current situation of increased revenue without commensurate profit growth.

03 Conclusion

The overseas expansion concept is currently Ugreen's most notable and successful label. However, in our view, going overseas is not an end but a means. Compared to the fiercely competitive domestic market, overseas markets offer more space and higher premiums in high-income countries. Ideally, this should significantly boost both revenue and profitability.

Yet Ugreen's performance is unsatisfying. Apart from the company's management level and branding issues, there may be another factor:

Not all overseas expansions are created equal.

As previously mentioned, Apple's product adjustments are the primary driver of rapid growth in the consumer electronics accessories industry, a trend prevalent globally. Just because the industry is fiercely competitive in China doesn't mean it's any less so overseas. Ugreen's failure to provide better products and value to consumers may explain why it hasn't reaped more profits despite its aggressive overseas expansion.