High Sea Freight Costs Lead to Increased Revenue but Not Profit for European Tech in H1

In the first half of this year, under the influence of the Red Sea incident, freight rates increased, which eroded the profits of cross-border home furnishing companies to a certain extent.

On the evening of August 21, "Online IKEA" ZEYU Technology (301376.SZ) released its interim performance report. The company's revenue increased by 40.74% year-on-year in the first half of the year, but the net profit attributable to the parent company decreased by 7.73% year-on-year.

Reporters learned that in addition to traditional e-commerce channels like Amazon, ZEYU Technology increased its efforts to develop new channels in the first half of the year, becoming a new growth point for revenue. However, at the same time, factors such as increased new product promotion costs, increased sea freight and storage costs, and exchange losses have led to weaker profitability than revenue.

New channels are making efforts

The financial report shows that ZEYU Technology's revenue increased by 40.74% year-on-year to 3.72 billion yuan in the first half of this year. This is mainly due to the increased investment in new products, the improvement of operational efficiency in the North American market, the optimization of the fulfillment network, and the expansion of emerging platforms such as OTTO, Temu, Shein, etc.

It is understood that ZEYU Technology mainly engages in the research and development, design, and sales of home products such as its own brand of furniture series, home series, outdoor sports, and pet series, and mainly sells products to Europe, the United States, Japan, and other countries and regions through overseas e-commerce platforms such as Amazon, OTTO, and independent stations. The company itself is not involved in product production, and the production process is entirely entrusted to external manufacturers.

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Looking at the regions, Europe remains the main market in the first half of the year, with revenue accounting for 62.06%, mainly due to the company's traditional competitive advantages and the expansion of platforms such as OTTO and Shein, with revenue increasing by 41.22% year-on-year in the first half of the year.

As a strategic focus of the company, the North American market's revenue increased by 41.12% year-on-year in the first half of the year, accounting for 36.53% of total revenue. According to ZEYU Technology, the company launched a large number of new products in the North American market in the first half of the year, added 3 third-party cooperation warehouses in the East, Central, and South of the United States, forming a five-warehouse layout covering the East, West, South, North, and Central United States, and further improved the market competitiveness of products by optimizing the end transportation strategy, including increasing the proportion of self-distribution and optimizing the carrier combination.

In addition to the traditional Amazon channel, the company has also developed new platforms such as Temu, Target, and TikTok Shop, contributing to the growth of performance in the North American region.

From the channel perspective, Amazon remains the company's most important platform, with revenue accounting for 69.1%, an increase of 42.68% compared to the same period last year. In addition, the OTTO platform maintains the strong growth trend of 2023, with a year-on-year growth rate as high as 97.11% in the first half of this year, and the proportion has significantly increased to 5.04%.It is understood that in recent years, influenced by the rapid development of the cross-border e-commerce industry, Chinese cross-border e-commerce platforms represented by Temu, Shein, TikTok Shop, and AliExpress have quickly swept the global e-commerce market. They have replicated the mature domestic e-commerce strategies overseas, quickly capturing market share and reducing the barriers for sellers to go global.

During the platform expansion period, many top sellers have also benefited from traffic convenience. For example, after Temu opened semi-managed services in March 2024, as one of the first batch of semi-managed sellers, Zhiou Technology started its US station. The company seized the traffic bonus of the platform's early stage with its own overseas inventory, end-of-journey fulfillment capabilities, and product competitiveness, laying the foundation for the European station's efforts in the second half of the year.

Looking at different categories, in the first half of the year, Zhiou Technology's revenue from home, furniture, pet, and outdoor sports series increased by 50.2%, 39.4%, 37.3%, and 3.4% year-on-year, respectively. Among them, the growth rate of the outdoor sports category was relatively weak, mainly due to factors such as sea freight delays and poor weather conditions during the peak season in Europe.

The reporter contacted Zhiou Technology regarding the performance of various channels in the North American market and the pace of new product launches, but had not received a response by the time of publication.

Profit Pressure

While revenue has increased significantly, Zhiou Technology's net profit has declined. The financial report shows that the company's net profit attributable to the parent company in the first half of the year was 172 million yuan, a year-on-year decrease of 7.73%; the net profit after deducting non-recurring gains and losses was 160 million yuan, a year-on-year decrease of 24.97%.

Regarding the year-on-year decline in net profit, Zhiou Technology explained that on the one hand, the company's strategy to increase market share led to a year-on-year decrease in the average unit price of product sales, as well as an increase in marketing expenses for new product promotion. The financial report shows that the company increased its investment in new products in the first half of the year, especially in home products, resulting in advertising expenses accounting for 0.9 percentage points more of revenue year-on-year, reaching 4.0%.

On the other hand, affected by the Red Sea incident, the company's sea freight costs increased year-on-year in the first half of the year. It is understood that in the first half of this year, there were frequent Red Sea attacks, shipping companies took detours around the Cape of Good Hope to avoid risks, and at the same time, due to tariff expectations in the United States and the European Union, merchants competed for containers to ship goods in advance, leading to increased demand. The supply chain disorder caused congestion at some ports, and the continuous tightening of transportation capacity kept sea freight costs high. According to data released by the Shanghai Shipping Exchange, in the first half of 2024, the average freight rate from Shanghai Port to European basic ports and US West basic ports increased by 224.61% and 188.58% compared to the average freight rate in 2023.

In response to the increase in sea freight costs, Zhiou Technology stated that the company has used long-term agreements to mitigate the risk of increased sea freight prices eroding short-term profits. According to their introduction, the company's home and furniture products have a larger volume and use a larger number of container shipments, which have a scale advantage. At the same time, the company has a good cooperative foundation with shipping agents, so compared with the market's spot price, the company has obtained a relatively low sea freight price through long-term agreements by exchanging volume for price, reducing the impact of the surge in sea freight costs on the company's profits in the short term.

At the same time, due to the need for business development scale, the company has expanded its self-operated and third-party overseas warehouse services, leading to an increase in storage costs in the first half of the year. It is understood that in terms of self-operated warehouses, as of the end of June 2024, Zhiou Technology's self-operated warehouses abroad have reached more than 350,000 square meters. Among them, the US region has completed the construction of a 5-warehouse layout, comprehensively improving the density and coverage of the US overseas warehouse layout. By combining its own warehouses with third-party warehouse cooperation, the company has optimized the local warehouse network layout. During the reporting period, the proportion of self-shipped orders in the US market increased from 8.5% in January to 15.7% in June.Additionally, the company's exchange gains and losses after hedging through hedging tools have shifted from a profit of 17.726 million yuan in the same period last year to a loss of 6.5968 million yuan in the current reporting period. Furthermore, the addition of 7.2477 million yuan in equity incentive share-based payment expenses for the year 2024 within the reporting period has also impacted the net profit for the period.

Apart from the aforementioned factors, ongoing friction in the international trade market may also affect the company's performance. It is understood that, as one of the main sales markets, since 2018, the U.S. government has implemented several trade protectionist policies, leading to escalating trade frictions and disputes between China and the U.S., with some of Zhiou Technology's products included in the list of U.S. tariff increases.

In response to this, Zhiou Technology has begun working on the migration of its supply chain to Southeast Asia this year,统一 planning and allocation of raw materials, production sites, and sales locations, aiming to minimize product costs while ensuring quality. Within the reporting period, the company has achieved shipments from Southeast Asia to the U.S. The company will continue to increase the proportion of shipments from Southeast Asia to the U.S. market, further reducing the impact of U.S. tariff increases on the price advantage of the company's products.