New Era in Tool Market: Domestic Giants Accelerate Overseas Expansion

As the United States enters a rate-cutting cycle, driving the recovery of demand in real estate and other sectors, along with major European and American supermarkets and other retailers having de-stocked for 18 months, the current inventory levels have dropped to historically low levels. The global tool industry's prosperity is expected to recover and enter a new cycle of prosperity. Benefiting from this, the latest performance of the domestic tool leader, Jiuxing Technology, has achieved rapid growth, which also confirms the validity of the industry's recovery logic.

The prosperity of the global tool industry is mainly determined by two factors: one is the housing sales situation in Europe and America, and the other is the level of channel inventory. In the past two years, the industry's operations have been under pressure due to the high-interest-rate environment in the United States and channel de-stocking. With the United States entering a rate-cutting cycle to drive the recovery of demand in real estate and other sectors, combined with the elimination of channel inventory disturbances, the industry's prosperity is expected to reverse and enter a prosperous cycle.

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Jiuxing Technology is a domestic tool leader listed company, with more than 90% of its revenue coming from the European and American markets, with a total market value of about 35 billion yuan. The performance forecast for the first three quarters of 2024 released on September 28 shows that the company achieved a net profit of 1.883 billion to 2.033 billion yuan, a year-on-year increase of 25%-35%, and a net profit of 1.934 billion to 2.088 billion yuan after deducting non-recurring gains and losses, a year-on-year increase of 25%-35%. The announcement also expects that the third-quarter revenue growth rate will exceed 30%, achieving accelerated growth. This further confirms the judgment of the global tool industry's recovery, and Jiuxing Technology is expected to continue to benefit from this new cycle of prosperity in the future.

The United States' rate cut drives expected improvements

The global tool market is about 100 billion US dollars, of which North America and Europe are the most important and have the highest proportion of the market. In these two regions, residents use a large number of detached buildings, and the per capita area is relatively large, resulting in high and time-consuming maintenance costs for residents' houses. At the same time, due to relatively high labor costs, residents in Europe and North America are more willing to carry out maintenance and repair work on their houses and ancillary buildings by themselves, so there is a large demand for professional and DIY tools in North America and Europe.

Looking at Jiuxing Technology, its revenue almost entirely comes from hardware tools, and the vast majority of its products are sold to the Americas and Europe. According to the semi-annual report for 2024, the sales in the Americas and Europe were 4.381 billion yuan and 1.721 billion yuan, respectively, accounting for 65.38% and 25.68% of the operating income, with a combined proportion of more than 90%.

For the profit growth in the first three quarters, Jiuxing Technology's primary explanation is that as the Federal Reserve enters the interest rate reduction channel, the real estate-related industries in the United States have clearly entered the bottom recovery stage. The third-quarter North American tool consumption growth rate reached 4%, and the industry has emerged from the zero-growth situation in recent three years. The company's customer orders and direct sales have both increased significantly, and it is expected that the company's third-quarter revenue growth rate will exceed 30%.

In the first half of 2024, Jiuxing Technology's revenue increased by 27.75% year-on-year. Combining the above data, it can be judged that the revenue growth accelerated in the third quarter.

In Europe and America, the performance of the tool industry is closely related to the real estate market. In the upward cycle of the real estate market, an increase in housing sales usually drives the demand for maintenance and improvement of residences, thereby increasing the demand for tools.

With the United States entering the interest rate reduction channel, the cost of buying a house will decrease accordingly. On September 18, 2024, the Federal Reserve announced that it would lower the target range of the federal funds rate by 50 basis points, to between 4.75% and 5.00%. This is also the first time in four years that the Federal Reserve has lowered interest rates. This marks the end of the most tightening interest rate hike cycle in 40 years since 2022 in the United States.According to Goldman Sachs' forecast, the sales of new and existing homes in the United States are expected to gradually rebound in the coming years. New home sales are projected to increase gradually from 680,000 units in 2023 to 858,000 units in 2027, while existing home sales will also rise from 4.092 million units in 2023 to 4.24 million units in 2025, and continue to grow in the following two years. Huanan Securities believes that, on the one hand, the increase in the number of old houses in North America means an increase in consumer demand for various tools, and on the other hand, the gradual recovery of the housing market in the future also provides a broader market outlook for hardware tools.

The end of channel destocking is another logic behind the recovery of the global tool industry's prosperity. In the tool industry chain, the channel holds a strong position, and retailers have a strong say. They will adjust their inventory operation strategies in stages under the influence of factors such as tariffs, ocean freight, and international geopolitical relations. This adjustment is transmitted to the upstream brand merchants and manufacturers' shipment end, reflecting a certain inventory cycle attribute. Therefore, the core factor determining the short-term prosperity of the industry is the inventory level of retailers.

Since 1997, the United States has experienced nine inventory cycles. The most recent inventory cycle began in the year of the outbreak of the COVID-19 pandemic, and a very obvious restocking cycle followed after 2020. One important reason is that in the second half of 2020, the pandemic began to break out overseas, and retailers actively restocked again based on hoarding and high prosperity at the retail end.

After two consecutive rounds of restocking, the channel inventory of retailers in European and American countries reached a historical high, and the demand side began to cool down under the influence of the Federal Reserve's continuous interest rate hikes. Therefore, since the third quarter of 2022, the retail channel has entered a destocking cycle, with a slowdown in order placement speed, reflecting a decline in the order growth rate of domestic contract manufacturers and brand merchants at the upstream production end.

The research report of Huanan Securities shows that in 2022, the actual consumption expenditure on tools in Europe and America decreased by 11.7%, which is the worst year on record in the past 30 years. The downturn in the terminal market also directly impacted the business of Juxing Technology, leading to a passive price reduction to destocking.

The financial report shows that in 2021, the gross profit margin of Juxing Technology's own brand (OBM) and customer brand (ODM) decreased by 6.7 percentage points and 5.09 percentage points year-on-year, respectively. In 2022, the gross profit margin of the own brand (OBM) further decreased by 0.53% to 24.69%.

After that, the three major leading retailers in the United States took the initiative to destock, and by the second quarter of 2023, Walmart's inventory decreased by 5.5% year-on-year. According to Home Depot's third-quarter financial report for 2023, Home Depot's merchandise inventory was $22.8 billion, a year-on-year decrease of 11%, and the inventory level significantly decreased. Historically, there is a certain lag between the judgment of inventory management by the management of Juxing Technology and the downstream market demand.From the current perspective, Huanan Securities believes that large European and American supermarkets and other retailers have undergone 18 months of inventory reduction, with current inventory levels having dropped to historically low levels. This has led to customers no longer actively reducing inventory, and the company's orders have generally rebounded to align with demand.

Zheshang Securities posits that the tool industry has faced operational pressures over the past year, dragged down by the high-interest-rate environment in the United States and channel inventory reduction behaviors. Looking ahead, as the U.S. enters a rate-cutting cycle that stimulates demand recovery, coupled with the elimination of channel inventory disturbances, the industry's prosperity is expected to continue its positive trend and improve step by step.

Juxing Technology has also given a very optimistic outlook. In its mid-2024 report, it stated that in the second half of the year, with the long-awaited Federal Reserve rate cut channel opening, the refinancing mortgage lock-in effect will gradually weaken. A large amount of suppressed demand in the terminal market will eventually be released as mortgage interest rates drop to 4% or below. This could lead to a new round of demand recovery and restocking orders in the second half of the year or early 2025.

Profitability Enhancement

As a leading tool company, Juxing Technology's performance growth not only benefits from the recovery of industry prosperity but also from enhanced profitability. Financial reports show that the company's gross margin for the first half of 2024 was 32.05%, an increase of 2.07 percentage points compared to the same period last year. Benefiting from this, the net profit margin during the period increased from 16.72% to 18.31%.

Zheshang Securities interprets this as the gross margin improvement being mainly due to economies of scale and tariff preferences contributed by the ramp-up of production capacity in Southeast Asia. Juxing Technology had early布局 in Vietnam, Cambodia, and Thailand, three major Southeast Asian manufacturing bases. As overseas production capacity continues to ramp up, the company is expected to continuously reduce the risk of trade frictions.

After years of development, Juxing Technology has initially established and perfected a global supply chain management system, establishing cooperative relations with thousands of suppliers. This ensures that the company is not limited to its own production capacity and can quickly respond to market demands and timely deliver various large orders. Relying on the well-developed warehousing, logistics, and distribution systems in China, the United States, and Europe, as well as 23 global production and manufacturing bases, the company can achieve global procurement and distribution. During the reporting period, the company plans to continue to add manufacturing capacity in Southeast Asia and is currently accelerating the implementation.

Juxing Technology's Quality and Return Double Improvement Action Plan released on August 30th stated that since 2017, the company has focused on its main business, vigorously developed its own brands (OBM business), and acquired overseas brands to expand its business. It has transitioned from traditional hand tools to fields such as laser measurement, tool cabinets, electric tools, and industrial tools, achieving rapid growth in its main business. The revenue share of its own brands has grown from a single-digit percentage to nearly 50%, significantly increasing the company's market share.

In 2024, the company proactively launched a large number of new products, vigorously developed its own brands, and strengthened the construction of online and offline channels. It continued to promote the globalization of production capacity layout, achieving good semi-annual performance.

Huanan Securities believes that Juxing Technology's total SKUs exceed 30,000, with non-hand tool categories accounting for nearly 40%. It has become one of the top two manufacturing companies in the world for laser measurement instruments and tool storage cabinets. The rich SKUs and production capacity layout demonstrate the company's continuous snowballing ability in the long-slope track of tool consumer goods, with flexible and efficient responses to future downstream demand recovery.However, there are also unfavorable factors for the performance of Superstar Technology. The performance forecast for the first three quarters of 2024 stated that the appreciation of the Chinese yuan against the US dollar in the third quarter led to a relative devaluation of the company's receivables and US dollar cash assets. This resulted in a significant decrease in the company's investment income compared to the second quarter, which had a certain negative impact on the company's net profit.