Huami Corporation (now Zepp Health Corp.) — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly Q4 figures are not separately provided in the supplied text. The company reported under the name Huami Corporation and its ADSs began trading on the NYSE under “HMI” on February 8, 2018.
Business Context
The company develops and sells smart wearable devices, including smart bands, smart watches and smart scales, supported by mobile applications and biometric-data services. Operations are conducted primarily in China through subsidiaries and consolidated variable interest entities using contractual VIE arrangements. The company shipped approximately 18.1 million devices in 2017.
- Xiaomi Wearable Products generated 78.8% of 2017 revenue.
- Self-branded products and other revenue, primarily Amazfit products, generated 21.2% of revenue, up from 7.9% in 2016.
- Xiaomi remained the company’s most important customer and distribution channel, accounting for approximately 14.9% of outstanding shares and 78.8% of revenue in 2017.
Financial and Operating Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | RMB2,048.9 million | RMB1,556.5 million | +31.6% |
| Gross profit | RMB494.7 million | RMB276.2 million | +79.1% |
| Gross margin | 24.1% | 17.7% | +6.4 percentage points |
| Operating income | RMB182.0 million | RMB13.4 million | Material improvement |
| Net income | RMB167.1 million | RMB23.9 million | Material improvement |
| Net income attributable to Huami | RMB167.7 million | RMB23.9 million | Material improvement |
| Basic earnings per ordinary share | RMB0.68 | RMB(0.22) | Turned positive |
| Diluted earnings per ordinary share | RMB0.65 | RMB(0.22) | Turned positive |
| Operating cash flow | RMB238.3 million | RMB17.3 million | Material improvement |
U.S. dollar translations use RMB6.5063 per US$1.00 and are provided for convenience. The filing’s consolidated financial statements were prepared under U.S. GAAP.
- Research and development expense increased 16.3% to RMB153.8 million, or 7.5% of revenue.
- General and administrative expense increased 11.9% to RMB114.9 million, while selling and marketing expense increased 58.2% to RMB44.0 million as the company promoted its own brands.
- Xiaomi segment revenue rose 12.6% to RMB1,614.5 million, primarily from a 16.1% increase in average revenue per unit.
- Self-branded and other revenue increased to RMB434.4 million from RMB122.3 million, driven by shipments increasing to approximately 1.0 million units from approximately 253,000.
- Cash, cash equivalents and restricted cash totaled RMB369.5 million at year-end, including RMB366.3 million of cash and cash equivalents and RMB3.2 million of restricted cash.
- Total assets were RMB1,465.5 million and total liabilities were RMB887.7 million at December 31, 2017.
- Bank borrowings were RMB30.0 million at year-end, consisting of a one-year borrowing at a fixed 5.0% interest rate.
- Amount due from related parties was RMB578.5 million, including RMB567.6 million from Xiaomi and its affiliates. The filing states that Xiaomi receivables were collected in the first quarter of 2018.
- Capital expenditures were RMB24.5 million. The company also disclosed RMB423.4 million of capital commitments for property, plant and equipment, primarily related to an industry base development agreement.
- Short-term and long-term investments totaled approximately RMB99.0 million at year-end.
Material Changes Versus Prior Period
- Revenue growth accelerated the company’s profitability, with operating margin improving from 0.9% to 8.9% and net margin improving from approximately 1.5% to 8.2%.
- Gross margin expansion reflected higher-priced products, improved manufacturing and supply-chain efficiencies, economies of scale and a more favorable product mix.
- The company increasingly diversified toward Amazfit and other self-branded products, although Xiaomi still represented the substantial majority of revenue and related-party balances.
- Operating cash flow increased sharply, partly supported by a RMB181.6 million increase in accounts payable and other working-capital movements.
- The company acquired an additional 22% of Yunding in July 2017, obtaining 57% control, and recognized a RMB2.1 million realized gain from remeasuring its prior investment.
- The company entered into business cooperation and strategic cooperation agreements with Xiaomi in October 2017. The strategic agreement grants most-preferred-partner status for specified Xiaomi wearable products through October 2020, subject to performance conditions and early termination rights.
- All preferred shares were converted into ordinary shares upon the qualified IPO completed in February 2018. The IPO generated approximately US$103.1 million of net proceeds for the company after expenses.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal numerical revenue or earnings guidance. Management expects continued investment in product development, self-brand marketing, international expansion and capital expenditures. It planned to launch Mi Band 3 in 2018 and expected self-branded gross margins to benefit from additional scale, while acknowledging that such benefits may diminish as the business matures.
- Xiaomi concentration: Xiaomi was the exclusive distributor for Xiaomi Wearable Products, jointly determined retail pricing and shared product gross profits with the company. Xiaomi could terminate or decline to renew agreements, develop competing products or reduce promotional support.
- Product and market risk: Rapid changes in consumer preferences, technology and product cycles could make existing products obsolete or require costly new-product development.
- Supply-chain risk: The company relies on contract manufacturers and limited or single sources for certain components, including BLE system-on-chip components. Component shortages occurred in 2017.
- Regulatory risk: ECG products and potentially the Mi Body Fat Scale may be subject to medical-device registration, production and advertising requirements. Data privacy, cybersecurity and China’s Cyber Security Law create additional compliance exposure.
- VIE and China risk: The company does not directly own key operating entities in China and relies on contractual arrangements. PRC authorities could challenge the structure, restrict operations or impair the company’s ability to consolidate the VIEs and receive economic benefits.
- Internal controls: Management concluded that disclosure controls were not effective at December 31, 2017. Two material weaknesses involved insufficient personnel with U.S. GAAP and SEC reporting expertise and the absence of a comprehensive U.S. GAAP accounting policies manual. Remediation was in progress.
- Share-based compensation: The company recorded RMB62.8 million of share-based compensation in 2017 and had RMB76.2 million of unrecognized share-based compensation expense at year-end.
- Unusual items: 2017 results included a RMB2.4 million realized gain from investments and RMB4.6 million of other income, primarily government subsidies. The company also recorded RMB2.4 million of inventory write-downs and RMB23.1 million of warranty expense.
- Insurance and litigation: The company stated that it did not maintain product liability or business interruption insurance and was not party to any material legal or administrative proceedings at the filing date.
- Audit and market-access risk: The company’s China-based auditor was not subject to PCAOB inspections at the time, which could limit investor ability to assess audit quality and create future filing or listing risks.
Most Important Facts for Investors to Verify
- Whether Xiaomi concentration has continued to decline and whether the Xiaomi strategic cooperation agreement remains in force on favorable terms.
- The collection, aging and credit quality of the RMB578.5 million related-party receivable balance, particularly the Xiaomi-related amount.
- Progress on remediation of the two material weaknesses and whether subsequent filings report effective disclosure and financial-reporting controls.
- The status of the RMB423.4 million capital commitment, including funding requirements, project economics and any associated revenue or tax conditions.
- Actual conversion of preferred shares, post-IPO share count, dilution from the 2015 and 2018 incentive plans, and the effect of share-based compensation.
- Regulatory approvals for medical-device products, data-security compliance and any changes to PRC rules affecting the VIE structure.
- Growth, margins and cash generation of the Amazfit/self-branded business independently of Xiaomi’s distribution network.
- Whether the filing’s annual 2017 figures are being used appropriately for a requested “2017 Q4” analysis, since the supplied Form 20-F does not provide a separate Q4 income statement or cash-flow presentation.