Business Context and Reporting Period
Zepp Health Corporation filed its Form 20-F for the fiscal year ended December 31, 2021. The filing provides annual FY2021 results rather than a separately reported 2021 fourth-quarter income statement; therefore, Q4-specific financial values are not clearly provided.
Zepp develops and sells smart wearable devices, including Xiaomi-branded products and its Amazfit and Zepp products, supported by mobile apps, health-data analytics and related healthcare initiatives. The Cayman Islands holding company conducts most China operations through PRC subsidiaries and consolidated variable interest entities under contractual arrangements.
Key Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | RMB6,250.1 million | RMB6,433.4 million | Down 2.8% |
| Gross profit | RMB1,305.6 million | RMB1,332.7 million | Down 2.0% |
| Gross margin | 20.9% | 20.7% | Up 0.2 percentage points |
| Operating income | RMB93.9 million | RMB174.2 million | Down 46.1% |
| Net income attributable to Zepp | RMB137.8 million | RMB228.8 million | Down 39.8% |
| Diluted earnings per share | RMB0.52 | RMB0.88 | Down 40.9% |
| Operating cash flow | Used RMB232.4 million | Provided RMB157.3 million | Declined by RMB389.7 million |
| Investing cash flow | Used RMB1,069.3 million | Used RMB206.9 million | Higher investment outflow |
| Financing cash flow | Provided RMB551.1 million | Provided RMB564.7 million | Down 2.4% |
FY2021 revenue was approximately US$980.8 million and net income attributable to Zepp was approximately US$21.6 million using the filing’s convenience translation rate.
- FY2021 selling and marketing expense increased 22.2% to RMB438.3 million, while research and development expense declined 4.3% to RMB515.1 million.
- Interest expense increased to RMB44.9 million from RMB22.6 million in FY2020.
- Cash, cash equivalents and restricted cash totaled RMB1,509.5 million at year-end, down from RMB2,275.8 million.
- Total assets were RMB6,085.5 million and total liabilities were RMB3,152.1 million at December 31, 2021.
- Inventories increased to RMB1,249.3 million from RMB1,217.5 million; accounts receivable increased to RMB537.1 million from RMB298.0 million.
- Outstanding bank borrowings totaled approximately RMB1.1 billion, including RMB358.0 million of short-term borrowings and RMB726.9 million of long-term borrowings.
- The filing states that management expects existing cash and anticipated operating cash flow to meet current needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Xiaomi Wearable Products revenue declined 24.7% to RMB3,340.9 million, with shipments falling from approximately 41.0 million to 28.5 million units.
- Self-branded products and others revenue increased 45.8% to RMB2,909.3 million, with shipments rising from approximately 4.7 million to 7.6 million units. This segment represented 46.5% of total revenue versus 31.0% in FY2020.
- Xiaomi-related revenue remained material at 53.5% of total revenue. Revenue from related parties was RMB3,350.0 million, and amounts due from Xiaomi and its affiliates were approximately RMB287.2 million at year-end.
- Overall gross margin improved modestly to 20.9%, but self-branded gross margin fell to 24.7% from 30.1%, partly reflecting product mix and increased costs.
- Operating margin declined to approximately 1.5% from 2.7%, primarily because of lower revenue, higher selling and marketing costs and higher interest expense.
- Cash flow was pressured by working capital, including a RMB673.2 million decrease in accounts payable. Investing outflows increased primarily because of the RMB959.7 million acquisition of a 29.99% interest in Jiangsu Yitong and other investment purchases.
- Long-term investments increased to RMB1,552.6 million from RMB444.0 million, primarily reflecting the Jiangsu Yitong investment.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide a clear numerical FY2022 revenue or earnings outlook in the supplied filing text.
- Management expects self-branded products to represent a larger portion of revenue and is investing in Amazfit and Zepp branding, international distribution and new product categories.
- COVID-19 continued to affect demand, logistics, manufacturing capacity and component availability. Semiconductor and other component shortages delayed production and reduced product availability during 2021 and into early 2022.
- The company depends heavily on Xiaomi, which is its exclusive distribution channel for Xiaomi Wearable Products. Xiaomi’s strategic cooperation agreement was extended through October 2023 but may be terminated earlier under specified conditions.
- The company relies on contract manufacturers and suppliers, including limited or single sources for certain key components. Supply interruptions, higher input costs, excess inventory or product quality issues could reduce margins and sales.
- The PRC government’s evolving rules on VIE structures, overseas listings, cybersecurity, data privacy and foreign investment could affect the company’s ability to operate, transfer cash or maintain its ADS listing. The filing states that the CSRC approval or filing status for overseas offerings was uncertain and that no CAC cybersecurity review had been completed as of the filing date.
- The PCAOB was unable to inspect the company’s mainland China auditor. The filing warned that the ADSs could be prohibited from U.S. trading under the Holding Foreign Companies Accountable Act if inspection restrictions continued.
- In December 2021, a Beijing CAC branch imposed a RMB0.5 million fine related to violations of the PRC Cybersecurity Law. The company paid the fine and completed requested rectification.
- Zepp purchased a 29.99% stake in Jiangsu Yitong for approximately RMB959.7 million and recognized RMB41.0 million of equity-method investment income in FY2021.
- The company repurchased 2,656,164 Class A ordinary shares in November and December 2021 for approximately US$3.4 million under a US$20 million authorization.
- A special dividend of US$0.025 per ordinary share, or US$0.10 per ADS, was declared in March 2022 and paid in April 2022. The company otherwise stated that it did not plan to pay dividends in the near term.
Most Important Facts for Investors to Verify
- Whether the FY2022 revenue mix continues shifting from Xiaomi products toward Amazfit and Zepp products, and whether self-branded margins recover.
- The status and renewal terms of the Xiaomi strategic and business cooperation agreements, including sales targets, pricing and termination provisions.
- Actual fourth-quarter 2021 revenue, profitability, inventory and cash flow, because the supplied Form 20-F presents annual rather than clearly separated Q4 results.
- The company’s ability to convert VIE-generated cash into funds available to the Cayman Islands parent, including PRC dividend, foreign-exchange and statutory-reserve restrictions.
- Progress on PRC regulatory filings, cybersecurity reviews, data-protection compliance and the enforceability of the VIE contractual arrangements.
- PCAOB inspection developments and the potential effect of HFCAA-related trading restrictions or delisting on the ADSs.
- Debt maturities, interest rates and the use of the RMB540.0 million long-term loan associated with the Jiangsu Yitong acquisition.
- Inventory aging, component availability, warranty costs and any further write-downs resulting from demand or supply-chain changes.