Capuski
By Doug Young
Lots has been happening lately in the kitchen of appliance maker JS Global Lifestyle Co Ltd. (OTCPK:JGLCF, 1691.HK). Most recently, the maker of gadgets like coffee makers and blenders warned this week that its profit fell nearly 40% last year.
But the big story for this company is the major haircut it gave itself last year by spinning off and separately listing its U.S.-based SharkNinja (SN) unit, which instantly lopped off about three-quarters of its revenue that came from the U.S. and European markets. The spinoff of its largest business knocked an even larger 85% off the value of JS Global’s Hong Kong-listed stock when the deal was completed last June, though that was largely because its shareholders received shares in the newly listed SharkNinja as part of the deal.
Truth be told, that spinoff looked like a shrewd move for JS Global at the time, since it separated its non-Asia business from its Asia business centered on its core China base. The move is part of a growing trend that is seeing more Chinese companies separate their foreign assets from their core Chinese operations to reduce the risk that Chinese regulators might try to meddle with their foreign business.
Since the spinoff, SharkNinja’s shares have actually performed relatively well. They initially dropped sharply after the spinoff, but have rallied since then and are now nearly 15% above where they traded at the time of the listing in late June. Meantime, JS Global’s shares have remained relatively stable since the spinoff, in sharp contrast with the nearly 20% drop for the Hang Seng China Enterprises Index over that time as investors worry about China’s slowing economy.
Still, the spinoff, while relatively good for investors, has left JS Global as a largely Chinese company once again. JS Global acquired Boston-based SharkNinja in 2017 as part of a “go global” campaign encouraged by Beijing at that time. Following the spinoff, the company is once again heavily reliant on the China market, though it retains rights to SharkNinja’s brands in Asia and is trying expand those brands, as well as its own core Joyoung brand, into other Asian markets.
That expansion, combined with the slowing economy in China, appear to be the two major factors behind this week’s profit alert. JS Global said it expects to report a profit of $70 million or more from continuing operations for 2023, down about 37% from a year earlier. Both figures only include the company’s business post-spinoff.
JS Global blamed the profit decline on costs related to the SharkNinja spinoff, as well costs related to its Asia expansion outside China. It also pointed to growing competition in China, which now accounts for the big majority of its sales.
Investors seemed relatively unfazed by the announcement, probably because the spinoff fees are a non-recurring item and the Asia expansion costs look like a necessary expense to diversify beyond China. The stock actually rose slightly after the announcement, though it’s down about 20% so far this year as investors worry about the Chinese economy.
Pandemic lift
JS Global is one of a number of companies that actually benefitted from the pandemic, since many housebound people turned to its products to pass their time by taking up hobbies like cooking and home improvements during that time. Tool maker Techtronic (0669.HK, OTCQX:TTNDY, OTCQX:TTNDF) is similar, and so is U.S. home improvement giant Home Depot (HD).
Those companies’ sales surged during the pandemic, but have more recently come back to earth as things return to normal. In that regard, JS Global’s non-China business actually seems to be holding up quite well, probably because the West ended its Covid restrictions earlier than China. The company’s revenue in the first half of last year, which includes SharkNinja, was basically flat year-on-year at $2.23 billion. But sales for its China-focused Joyoung segment fell by 23% to $491 million as Chinese consumers became more cautious.
The company’s gross profit for the first half of the year, which includes SharkNinja business, was down 5.1% to $862 million, while its adjusted profit fell by a larger 12.1% to $189 million. Thus, the big 37% decline for JS Global’s full-year 2023 profit could indicate its situation worsened in the second half of the year post-spinoff, which corresponds to growing consumer caution reported by many companies in China starting around last September.
The company’s new position as a nearly pure China play may at least partly explain its latest price-to-earnings (P/E) ratio of just 1.7. By comparison, Techtronic, whose brands like Milwaukee and Ryobi are sold mostly outside China, trades at a far higher ratio of 20, while Home Depot is even higher at 23. Even after factoring in a “China discount,” the company’s shares appear to be priced at quite a discount compared to global peers.
We suspect that investors are probably worried about the company’s reliance on China, which is likely to further erode its profits and could even send it into the red as the economy stagnates and consumers spend less on its relatively premium appliances that are largely non-essential.
At the same time, the company isn’t exactly flush with cash to weather any downturn. It reported just $245 million in cash as of last June, down by more than half from about $500 million a year earlier. Its bank borrowings as of June, excluding borrowings related to the spun off SharkNinja business, stood at $371 million.
Perhaps in anticipation of colder times ahead, the company announced in November it would sell its 25.5% stake in Jiuyang Bean Industry, a soymilk powder and soymilk machine maker, to a company owned by its Chairman Wang Xuning for 177 million yuan ($25 million).
At the end of the day, JS Global is a company that’s returning to its China roots with the spinoff of SharkNinja. At the same time, the company is trying to diversify beyond China with moves into Asia. The company’s profits are probably coming under heavy pressure due to that expansion and the China slowdown, which may explain why the shares currently trade at such a steep discount.
Disclosure: None.
