VIOT - Viomi: Valuation Below Cash Position And Results Likely To Recover

Summary

• The company’s results were affected significantly by China’s zero COVID policy, with Q3 2022 net revenues declining by 35.1% year on year.
• This policy was abandoned in December 2022, and I expect annualized sales to slowly reclaim the $800 million level and net income to return to about $40 million per year.
• The downside risk seems limited as Viomi has over $160 million in cash, short term deposits, and short term investments as of September and the enterprise value is negative.

Introduction

I like to write about companies that lack coverage on SA and today I'm taking a look at Viomi Technology ( VIOT ). It’s a relatively small Internet of things (IoT) company whose results have been under pressure due to COVID-19 lockdowns in China, and I think this opens a good investment opportunity as the market valuation has dropped below its cash position. Viomi Technology was in the red in Q3 2022 but I expect its financial results to improve over the coming quarters as China ended its zero Covid policy in December. Let’s review.

Overview of the business and financials

Viomi was founded in 2014 and its first product was a water purifier under the Xiaomi brand that was launched in 2015. The company grew rapidly over the following years and today its portfolio includes over 60 IoT-enabled smart home products such as refrigerators, dishwashers, washing machines, water heaters, sweeper robots, and air conditioners.

The vast majority of revenues are coming from China and just over 60% of sales in Q3 2022 came from Viomi-branded brand.

The company has over 900 patents and its product portfolio reminds me of a rapidly growing household appliance IoT company from my home country named Allterco. Viomi was listed on NASDAQ in late 2018 in a period when it was also growing rapidly, with revenues soaring from $45 million in 2016 to $667.5 million in 2019. Unfortunately for investors, the company was affected significantly by COVID-19 lockdowns and China’s zero COVID strategy led to a significant deterioration in its financial performance as demand for many of its products evaporated. Turning our attention to the Q3 2022 results, net revenues slumped by 35.1% year on year to 685.8 million renminbi ($96.4 million) and Viomi posted a $13.7 million loss from operations despite significantly scaling down selling and marketing expenses during the period. Net revenues were also negatively impacted by the complete cut off of the sales of Xiaomi-branded sweeper robots.

However, there were a few silver linings. Cumulative household users continued increasing at a healthy rate and the percentage of household users with more than a single connected device continued to grow during the period.

Viomi CEO Xiaoping Chen said during the Q3 2022 earnings call that the gross margin was expected to increase to about 20% in Q4 and that the company had made good progress in product innovation, brand promotion, and channel expansion over the period. However, he said that Viomi sales in Q4 2022 were expected to decline year on year.

Looking at the future, I expect 2023 sales and margins to improve significantly as China abandoned its draconian zero COVID policy in December following unprecedented protests. Viomi launched several new products in 2022, including the 1200G Quanxian AI water purifier, the Alpha 3 Pro AI sweeping robot, and the Super 2 Max AI gas water heater. I expect demand for its products to improve significantly over the coming months and the company should also get a boost from strategic cooperation deals inked in late 2021 and early 2022 with Tmall, JD.com ( JD ), and China Telecom ( CHJHF ) for promoting its IoT home solutions. In addition, it’s possible that Viomi plans to expand its sales abroad as the company took part in the 2022 edition of International Funkausstellung Berlin, one of the oldest industrial exhibitions in Germany.

Turning our attention to the balance sheet, I think that Viomi is in a great position as the sum of cash, short term deposits, and short term investments stood at $164.2 million as of September 2022. The company had barely any debts and the enterprise value stands at negative $55.8 million as of the time of writing. In fact, its $93.6 million market capitalization is below its cash position.

With so much cash on hand, Viomi announced in October the launch of a $10 million share repurchase program and this could become an important catalyst for the share price over the coming months.

Overall, I expect Viomi's annualized sales to slowly reclaim the $800 million level and net income to return to about $40 million per year. The past few years have been a bumpy ride, but the future looks bright now that the zero COVID policy is finally abandoned. The company is operating in an exciting sector as the global market for smart home cloud platforms is growing rapidly and sales are expected to achieve a compound annual growth rate [CAGR] of over 17% during this decade according to market research analysis by Persistence Market Research.

Turning our attention to the risks for the bull case, I think that there are two major ones. First, it’s possible that lockdowns in China return if COVID cases start soaring again and this is likely to put pressure on Viomi’s business once again. Second, I don’t see anything unique or groundbreaking in the company’s product portfolio and it’s possible that sales and margins don’t recover as life in China returns to normal. Viomi is a relatively small home firm relying almost entirely on its domestic market and it’s possible that it loses market share to larger local competitors such as Tuya, and TP-Link.

Investor takeaway

Viomi has a strong balance sheet with over $160 million in cash, short term deposits, and short term investments and the enterprise value is negative. I think that revenues are likely to improve significantly in 2023 and that the company could return to profitability over the coming months. Even if something goes wrong, the downside risk seems limited in light of the strong cash position and the recently announced share repurchase program. I rate Viomi as a speculative buy.

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