Business context and reporting period
This is Huami Corporation’s Form 20-F annual report for the fiscal year ended December 31, 2019, filed April 23, 2020. The request identifies Zepp Health Corp. and “2019 Q4,” but the supplied filing is for Huami Corporation, the company’s former name, and does not provide a standalone fourth-quarter income statement. Financial statements are prepared under U.S. GAAP and include the company’s PRC subsidiaries and consolidated variable-interest entities.
Huami develops and sells smart wearable devices, including Xiaomi-branded products and its own Amazfit-branded products, supported by mobile applications and health-data services. It shipped approximately 42.3 million wearable devices in 2019 and reported 30.7 million mobile-app monthly active users at year-end.
Key financial metrics
| RMB millions, except per-share data | 2018 | 2019 | Change |
|---|---|---|---|
| Revenue | 3,645.3 | 5,812.3 | +59.4% |
| Gross profit | 939.5 | 1,467.7 | +56.2% |
| Gross margin | 25.8% | 25.3% | -0.5 percentage points |
| Operating income | 365.7 | 606.5 | +65.8% |
| Operating margin | 10.0% | 10.4% | +0.4 percentage points |
| Net income | 336.3 | 573.4 | +70.5% |
| Net income attributable to Huami | 340.0 | 575.2 | +69.2% |
| Basic earnings per ordinary share | RMB0.54 | RMB2.35 | Increase |
| Diluted earnings per ordinary share | RMB0.51 | RMB2.24 | Increase |
U.S. dollar translations for 2019 use RMB6.9618 per US$1.00. Reported 2019 revenue was US$834.9 million, gross profit was US$210.8 million, operating income was US$87.1 million and net income attributable to Huami was US$82.6 million.
- Xiaomi Wearable Products revenue rose 71.9% to RMB4,193.7 million, representing 72.2% of total revenue. Shipments increased from approximately 24.4 million to 38.4 million units.
- Self-branded products and others revenue rose 34.2% to RMB1,618.6 million, or 27.8% of total revenue. Self-branded shipments increased from approximately 3.1 million to 3.9 million units.
- Xiaomi segment gross margin declined from 22.8% to 21.4%, while self-branded segment gross margin increased from 31.8% to 35.3%.
- Research and development expense increased 63.7% to RMB430.8 million, selling and marketing expense increased 88.5% to RMB182.0 million, and general and administrative expense increased 16.1% to RMB248.5 million.
- Interest income increased to RMB33.5 million from RMB11.6 million. The company recorded RMB2.6 million of long-term investment impairment and RMB1.1 million of losses from equity-method investments.
Cash flow, liquidity, debt and balance sheet
- Net cash provided by operating activities was RMB428.0 million in 2019, down from RMB707.6 million in 2018, primarily because of higher amounts due from related parties, inventories and accounts receivable.
- Net cash used in investing activities was RMB112.7 million, including RMB180.9 million of long-term investments and RMB34.3 million of property, plant and equipment purchases.
- Net cash provided by financing activities was RMB25.6 million, including RMB49.2 million of proceeds from the April 2019 ADS offering, partly offset by repayment of RMB20.0 million of bank borrowings.
- Cash, cash equivalents and restricted cash totaled RMB1,804.0 million at December 31, 2019, compared with RMB1,451.8 million at December 31, 2018. Approximately 70.3% was held in China and 69.8% was held by the VIEs.
- Cash and cash equivalents were RMB1,803.1 million; restricted cash was RMB0.9 million. Current assets were RMB4,392.5 million and current liabilities were RMB2,481.8 million.
- Bank borrowings were fully repaid at year-end. Subsequent to year-end, the company borrowed approximately RMB882 million from several commercial banks, with one-year maturities and a weighted-average interest rate of 3.33%, for daily operations.
- Inventories increased to RMB893.8 million from RMB484.6 million, while amounts due from related parties increased to RMB1,421.2 million from RMB656.4 million. Accounts payable increased to RMB2,000.0 million from RMB1,064.1 million.
- Contractual lease commitments totaled RMB202.1 million, including RMB41.7 million due in 2020. The filing reports no material off-balance-sheet guarantees or derivative arrangements.
Material changes versus the prior comparable period
- Revenue growth accelerated through higher Xiaomi product volumes and continued, but slower, growth in Amazfit products.
- Overall gross margin narrowed modestly because Xiaomi products, which carry lower margins, represented a larger share of revenue. The higher-margin self-branded business improved its margin materially.
- Operating and net margins improved despite substantial increases in research, development, selling and marketing spending.
- Operating cash conversion weakened: operating cash flow fell 39.5% while net income rose 70.5%, reflecting working-capital investment and the concentration of year-end receivables and inventory around Xiaomi’s promotional orders.
- The company adopted the U.S. GAAP lease standard in 2019, recognizing operating lease right-of-use assets of RMB108.7 million and lease liabilities. The filing states that adoption had no material impact on operations or cash flows.
- The material weakness in internal control over financial reporting identified as of December 31, 2018, relating to supervisory review of complex transactions, was reported as remediated by December 31, 2019.
Guidance, outlook, commentary and risks
The filing does not provide formal 2020 revenue or earnings guidance. Management states that cash and anticipated operating cash flow were expected to meet current and anticipated needs for at least the next 12 months, while also noting that additional financing could be pursued.
- COVID-19 temporarily closed offices and contract-manufacturing facilities in early 2020. Manufacturing volumes declined in January and February and were still ramping toward full capacity in March. Management expected lower demand in China and overseas markets and warned of possible component and raw-material shortages; the duration and financial impact were described as not reasonably estimable.
- Xiaomi accounted for 72.2% of 2019 revenue, and Xiaomi and its affiliates accounted for RMB4,281.0 million of revenue and RMB1,418.6 million of year-end receivables. The strategic cooperation agreement, which provided preferred-partner status, was scheduled to expire in October 2020 and could be terminated earlier under specified performance conditions.
- The company depends on third-party contract manufacturers and limited or single sources for certain components, including Bluetooth chips and sensors. Inventory forecasting, product quality, warranty claims and component availability could affect margins and cash flow.
- The company is expanding its Amazfit brand and international distribution, but faces competition from Apple, Samsung, Huawei, Xiaomi, Fitbit, Garmin and other consumer-electronics and watch companies.
- The company operates substantially through PRC VIE contractual arrangements. Regulatory changes, including uncertainty under China’s Foreign Investment Law, could restrict the arrangements, impair control over the VIEs or prevent consolidation of their results.
- Personal, biometric and health data create privacy, cybersecurity and regulatory exposure. The filing also notes a December 2019 government notice concerning cancellation and information-push procedures for one mobile application; the company made corrective changes.
- Other risks include PRC economic and regulatory conditions, currency controls, trade restrictions, intellectual-property disputes, product liability without product-liability insurance, dependence on key personnel, related-party conflicts and limits on the ability to transfer cash from PRC entities to the Cayman Islands holding company.
- The company does not expect to pay cash dividends in the foreseeable future and intends to retain earnings for business development.
Most important facts for an investor to verify
- Confirm that the filing applies to the requested issuer and period: the supplied document is Huami Corporation’s FY2019 Form 20-F, not a standalone 2019 Q4 filing for an entity named Zepp Health Corp.
- Reconcile Xiaomi-related revenue, receivables, contractual terms and the October 2020 strategic-agreement expiration.
- Assess whether the RMB882 million of post-year-end borrowing and COVID-19 operating disruption changed liquidity, leverage or covenant risk.
- Evaluate the sustainability of the 2019 earnings increase given weaker operating cash flow, rising inventories and related-party receivables.
- Review the segment margin difference and determine whether Amazfit growth can offset Xiaomi concentration and lower Xiaomi product margins.
- Review VIE contractual agreements, PRC regulatory developments and the proportion of assets and revenue held through VIEs.
- Verify the remediation of the prior internal-control material weakness and review the auditor’s scope, noting that no auditor attestation report was required because the company remained an emerging growth company.