VIOMI TECHNOLOGY -ADR VIOT
July 19, 2020 - 4:59pm EST by
levcap65
2020 2021
Price: 6.41 EPS 0 0.63
Shares Out. (in M): 71 P/E 0 10.2
Market Cap (in $M): 455 P/FCF 0 0
Net Debt (in $M): -168 EBIT 0 56
TEV ($): 287 TEV/EBIT 0 5.1

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Description

Viomi (in Chinese: Yunmi / 云米 is a Chinese manufacturer of smart home appliances, consumables and services. The company was founded in 2014 as founder and CEO Xiaoping Chen partnered with Xiaomi (and specifically with Lei Jun - Xiaomi’s founder and CEO) to create one of the first Xiaomi Ecosystem companies. For those not familiar with Xiaomi’s business model and the ecosystem segment specifically, Xiaomi has been investing in (mostly) hardware startups for over 6 years now, with the idea of decentralizing product development and manufacturing in order to scale its product catalog in a faster, more efficient manner. The way it works is that in most cases the ecosystem company would get early-stage funding from Xiaomi, as well as some resources related to the design and procurement process. Once the products are ready to ship, they are marketed through several different distribution channels: 

(i) Xiaomi’s offline and online properties and under the Xiaomi brand; 

(ii) Under the ecosystem company’s own brands through either DTC or 3rd party retailer/eCommerce platform. 

 

To show one example, Huami (NYSE:HMI) is a Xiaomi ecosystem company specializing in wearables. When you purchase the Xiaomi mi-band (currently the world’s best selling wearable), what you’re really buying is a Huami designed and manufactured product that is marketed and sold exclusively under the Xiaomi brand, with both companies splitting the gross profit between them (in the process Xiaomi would act as a retailer and take some inventory risk). The Amazfit brand is Huami’s own, where Xiaomi is not a distribution partner and only benefits indirectly through its equity stake in the company. Huami and Viomi are two examples of ecosystem companies who have done well building their own brands and distribution channels, while gradually reducing dependency on Xiaomi.

 

While the high dependency on Xiaomi clearly has some embedded risks, we find the ecosystem relationships to be highly beneficial to both sides in most cases. Xiaomi gets to rapidly expand its product offering without either manufacturing risk or a long development process. It also enjoys healthy incremental margins as OPEX associated with the ecosystem products is minimal, and builds on the existing distribution and marketing infrastructure. The ecosystem company gets a “fast-track” to scaling its hardware business, a much needed capital to develop its own brand and distribution channels, and benefits from Xiaomi’s experience and guidance in supply chain management and product design. 

Although this isn’t the topic of this writeup, if you are interested in investing in Viomi, I think it’s worth gaining a better understanding of the Xiaomi ecosystem and I’d recommend starting with this 2016 speech from Liu De, Xiaomi’s SVP for ecosystem products and a member of Viomi’s BoD. 

Of all the ecosystem companies that are currently publicly traded in the US and China (we counted 4 - Viomi and Huami in the US, Roborock and Ninebot in China), we think Viomi offers the most compelling investment opportunity for three main reasons. First, we think the home appliances industry is going through a secular change that should result in better economics for industry participants in general. Second, Viomi is well managed and perfectly positioned to emerge as a major winner from this trend. Third, at 10x our estimated 2021 GAAP EPS, Viomi is very cheap - not something you’d expect to find in today’s market for a fast growing consumer brand that excels in exactly the “right” places (DTC, IoT+5G). 

Home Appliances Industry

“It’s the distribution, stupid” (soon-to-be an ancient Chinese proverb).

 

Unlike many other consumer facing sectors, the home appliances industry has only seen small gradual changes over the past couple of decades. We’ve seen plenty of consolidation and a clear shift of power as three Chinese giants (Midea, Gree and Haier) practically took control of the industry, but for the untrained eye not a lot has changed. The experience of buying a washing machine, a dishwasher or an A/C is pretty much the same as it was 20 years ago, except that it at least partly takes place online nowadays. 

The pictures above illustrate the offline and online experience of getting a new washing machine for >95% of the world. Whether offline or online, the experience is quite similar. There’s very little brand differentiation or visual differences between the different models. What it comes down to is basically the cheap option, the expensive option, and the one somewhere in the middle that the salesman tells you is the best price/quality combination that you usually end up going for. Since I’m writing this for the value investors club, you wouldn’t be surprised that the outcome of this is relatively poor economics for the OEMs. Dependence on key distributors, inability to raise prices and low customer loyalty resulted in low ROIC and a general lack of appetite to the sector from most good investors.   

 

But things ARE actually changing, and unsurprisingly China is leading the way. 

 

Two key trends are currently disrupting this model. Direct-To-Consumer (DTC) and Connected Homes (which is further amplified with a wider penetration of 5G technology). In a connected home, brands matter much more. If you are already using the Mi-Home app (Xiaomi) to control your security cameras and A/C, and you’re looking for a water purifier - it makes much more sense to buy it from Xiaomi as well and skip the price comparison process. If you’re furnishing an entirely new home, it makes an even greater sense to buy all of your smart appliances from the same brand - and specifically one with an easy-to-use mobile app. It would be quite inconvenient to have one app for your refrigerator, another for the air purifier and a third one to remotely open the A/C (think of a scenario where you left your house in a hurry and want to make sure that everything is turned off). The benefit of having a centralized interface is clear even before we go deeper into the future with cyber-security layers, or an embedded eCommerce solution for consumables and services (filters, light bulbs, service chat). In a way, software is eating the home appliances industry too (which makes sense since software is eating the world and appliances are part of the world).   

The move towards DTC is what enables the brands to take that path and what speeds up the process of obviating the middleman. This is already happening in China, online and especially offline. It might take some time to get out of China but expect your future appliance store to look much more like the pictures below than the one I’ve shown above.