20-F: Viomi Returns to Profit Amid Strategic Water Focus

Viomi Technology Co., Ltd. reported a net income of RMB63.4 million in 2024, a significant turnaround from previous losses, driven by a strategic divestiture and focus on home water solutions.

Summary

• Viomi completed a reorganization transaction in August 2024, divesting certain IoT@Home portfolio products (excluding range hoods, gas stoves, and water heaters) for RMB65 million in cash to focus on home water solutions.
• Net revenues increased by 29.3% to RMB2,119.0 million (US$290.3 million) in 2024 from RMB1,638.7 million in 2023, primarily due to growth in home water systems.
• Revenues from home water systems grew by 39.0% to RMB1,498.4 million (US$205.3 million) in 2024.
• Consumables revenue decreased by 14.5% to RMB277.7 million (US$38.0 million) in 2024, mainly due to decreased sales of water purifier filters to Xiaomi, partially offset by increased Viomi-branded filter demand.
• Kitchen appliances and others revenue increased by 45.2% to RMB342.9 million (US$47.0 million) in 2024, driven by increased sales to Xiaomi.
• Gross profit increased by 5.1% to RMB548.7 million (US$75.2 million) in 2024, but gross margin decreased to 25.9% from 31.9% in 2023 due to a shift towards lower gross margin products.
• Net income from continuing operations attributable to ordinary shareholders was RMB144.4 million (US$19.8 million) in 2024, up from RMB116.8 million in 2023.
• Net loss from discontinued operations decreased to RMB81.0 million (US$11.1 million) in 2024 from RMB201.4 million in 2023.
• Overall net income attributable to ordinary shareholders was RMB63.4 million (US$8.7 million) in 2024, a significant improvement from a net loss of RMB84.7 million in 2023.
• Research and development expenses decreased by 4.0% to RMB142.9 million (US$19.6 million) in 2024, representing 6.7% of net revenues.
• Selling and marketing expenses decreased slightly by 1.6% to RMB211.2 million (US$28.9 million) in 2024, representing 10.0% of net revenues.
• Cash and cash equivalents and restricted cash increased to RMB1,167.5 million (US$159.9 million) as of December 31, 2024, from RMB636.4 million in 2023.
• The company identified material weaknesses in internal control over financial reporting related to insufficient U.S. GAAP accounting personnel and lack of comprehensive U.S. GAAP policies, which were first identified in 2016-2018 and remain outstanding as of December 31, 2024.
• An independent investigation concluded that certain loan transactions identified by PwC had business substance and were properly recorded, and the Hong Kong-incorporated company involved is not a related party.

Sentiment

Score: 7

Explanation: The company demonstrated a strong financial turnaround in 2024, achieving net income after two years of losses, driven by a clear strategic focus on home water solutions and significant revenue growth. New product launches and improved operational efficiencies are positive indicators. However, persistent material weaknesses in internal controls, high customer concentration with Xiaomi, and ongoing delays in asset transfers from the reorganization temper the overall positive sentiment.

Positives

• Achieved a net income of RMB63.4 million (US$8.7 million) in 2024, reversing net losses from the previous two years.
• Net income from continuing operations increased by 23.6% to RMB144.4 million (US$19.8 million) in 2024, demonstrating improved core business performance.
• Total net revenues increased by 29.3% in 2024, indicating strong top-line growth following the strategic divestiture.
• Home water systems revenue, the company's strategic focus, grew significantly by 39.0% in 2024.
• Successful launch of new innovative products like the Viomi Kunlun Mineral AI Water Purifier and Vortex series in North America, enhancing product portfolio and market reach.
• Improved operational efficiency and streamlined organizational structure contributed to increased net income from continuing operations.
• Inventory turnover days improved from 55 days in 2023 to 31 days in 2024, indicating better inventory management.
• Cash and cash equivalents and restricted cash significantly increased to RMB1,167.5 million (US$159.9 million) by year-end 2024, strengthening liquidity.
• Remediation of previously identified material weaknesses related to input VAT calculation and financial statements review as of December 31, 2024.

Negatives

• Gross margin declined to 25.9% in 2024 from 31.9% in 2023, primarily due to a change in product mix towards lower gross margin products.
• Consumables revenue decreased by 14.5% in 2024, mainly due to decreased sales of water purifier filters to Xiaomi.
• Continued reliance on Xiaomi, with sales to Xiaomi accounting for 82.7% of net revenues in 2024, posing concentration risk.
• Identified material weaknesses in internal control over financial reporting persist, specifically regarding U.S. GAAP understanding and comprehensive accounting policies.
• Accounts receivable from a related party (Xiaomi) significantly increased to RMB591.2 million (US$81.0 million) as of December 31, 2024, from RMB4.4 million in 2023, increasing credit risk exposure to a single customer.
• Accounts and notes payable increased substantially to RMB772.2 million (US$105.8 million) in 2024 from RMB317.5 million in 2023.

Risks

• Significant portion of revenue (82.7% in 2024) derived from sales to Xiaomi, making the company highly dependent on this strategic partner and customer.
• Intense competition in the smart home water solutions market from other providers, internet companies, and traditional home water solution companies, potentially leading to pricing pressures and reduced profitability.
• Inability to effectively manage growth and increased business complexity, especially with expansion into new product categories and overseas markets.
• Failure to successfully develop and commercialize new products, services, and technologies in a timely manner, which could adversely affect operating results.
• Susceptibility to supply shortages, interruptions, long lead times, and price fluctuations for raw materials and components, disrupting the supply chain.
• Reliance on certain contract manufacturers for product production, posing risks of operational difficulties, quality control issues, and failure to meet deadlines.
• Potential liabilities arising from product defects or other quality issues, leading to reputational harm, lost revenues, product recalls, and increased warranty expenses.
• Reliance on a limited number of third-party e-commerce platforms (e.g., JD.com, Pinduoduo, Tmall, Youpin) for online sales, with risks if cooperation deteriorates or becomes more costly.
• Risks associated with network partners and their personnel for Viomi offline stores, potentially affecting brand image and customer satisfaction.
• Inability to adapt to rapid technological changes and implement enhancements to products and services, impacting competitiveness.
• Risks inherent in managing in-house product manufacturing facilities, including personnel expenses, quality control, and compliance with environmental laws.
• Exposure to potential liabilities from product defects or misuse, which may exceed insurance coverage.
• Operating results may be subject to seasonality, with higher sales expected in the second and fourth quarters due to shopping festivals.
• Increasing labor costs in China and potential reoccurrence of inflation could adversely affect business and costs of operations.
• Potential conflicts of interest due to Mr. Xiaoping Chen controlling the divested IoT@Home business and being a director of Xiaomi.
• Material weaknesses in internal control over financial reporting, potentially leading to inaccurate financial reporting or fraud.
• Limited insurance coverage, lacking business disruption insurance or policies covering IT infrastructure damages.
• Adverse effects from a severe or prolonged downturn in the Chinese or global economy, health epidemics, natural disasters, or other acts of God.
• Increased costs or risks due to growing focus on environmental, social, and governance (ESG) matters from investors and government.
• Uncertainties regarding the enforceability of VIE contractual arrangements under evolving PRC laws and regulations, potentially leading to severe penalties or relinquishing interests in operations.
• Risks related to the PCAOB's ability to inspect auditors in China, potentially leading to delisting of ADSs under the HFCAA.
• Significant oversight and discretion of the PRC government over business operations, which could result in material adverse changes.
• Difficulties in effecting service of legal process, enforcing foreign judgments, or bringing actions in China against the company or management based on foreign laws.
• Changes in international trade policies and rising political tensions, particularly between the U.S. and China, may adversely impact business and operating results, including potential restrictions on investments.
• Classification as a PRC resident enterprise for tax purposes could result in unfavorable tax consequences for the company and non-PRC shareholders.
• Uncertainty regarding indirect transfers of equity interests in PRC resident enterprises by non-PRC holding companies, potentially leading to additional taxes.
• Revocation or unavailability of preferential tax treatments could adversely affect results of operations.
• PRC regulations on mergers and acquisitions may make it more difficult to pursue growth through acquisitions.
• PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject beneficial owners or subsidiaries to penalties or limit capital injection.
• Failure to comply with PRC regulations regarding employee stock incentive plans may subject participants or the company to fines.
• Failure to make adequate contributions to government-sponsored employee benefits plans as required by PRC regulations may lead to penalties.
• Risks relating to leased real properties, including unregistered leases and potential claims by real owners.
• Governmental control of currency conversion may limit the ability to utilize cash balance effectively and affect investment value.
• The approval of and filing with the CSRC or other PRC government authorities may be required for future offshore offerings, with uncertainties regarding timing and outcome.

Future Outlook

The company expects its financial condition and results of operations for the year ending December 31, 2025, to be materially affected by the 2024 divestiture, with historical results not being indicative of future performance. It plans to continue investing in R&D for AI and emerging technologies in home water solutions, strengthen brand awareness, and optimize sales channels. The company anticipates absolute revenues from Xiaomi to remain stable or increase, and aims to expand its overseas business.

Management Comments

• Embracing the mission of AI for Better Water, we strive to utilize AI technology to provide better drinking water solutions for households worldwide.
• Our continuous technological innovations extend filter lifespan and lower user costs, promoting the adoption of water purifiers and supporting a healthy lifestyle while effectively addressing the rising global demand for cleaner, fresher and healthier drinking water.
• We operate a world-leading Water Purifier Gigafactory with an integrated industrial chain that boasts optimal efficiency and facilitates continuous breakthroughs in water purification. This state-of-the-art facility enables us to achieve economies of scale and accelerate the global popularization of residential water filtration.
• Our management believes that there is only a remote possibility that the scenario of accumulated earnings of VIEs exceeding fees paid to PRC subsidiaries (or disallowed fee structure) would happen, leading to non-deductible transfers and reduced after-tax income.
• We are fully committed to continuing to implement measures to remediate our material weaknesses and other control deficiencies in our internal control over financial reporting.

Industry Context

The company operates in the rapidly evolving home water solutions market in China, which has experienced rapid growth but faces uncertainties from China's economy and consumer disposable income. The market is characterized by fast-paced technological advancements, including AI and 5G integration, and intense competition from traditional appliance companies, consumer electronics companies, and internet companies entering the hardware space. The company's focus on AI-enabled water purification systems and an 'Equipment + Consumables' model positions it to capitalize on the increasing global demand for clean drinking water and smart home integration.

Comparison to Industry Standards

• The company's gross margin of 25.9% in 2024 is lower than its 31.9% in 2023, which could indicate competitive pricing pressures or a shift to lower-margin products compared to industry peers in the smart home or appliance sector.
• The significant reliance on Xiaomi (82.7% of net revenues) is a high customer concentration compared to diversified players in the home appliance industry, which typically have broader distribution channels and customer bases.
• The company's R&D expenses as a percentage of net revenues decreased to 6.7% in 2024 from 9.1% in 2023, which may be lower or higher than industry averages depending on the specific sub-segment (e.g., pure hardware vs. software-heavy IoT firms).
• The improvement in inventory turnover days from 55 to 31 days suggests better supply chain efficiency, potentially outperforming less agile competitors in managing stock.

Corporate Governance

Legal Proceedings

• Currently not a party to any material legal or administrative proceedings. However, the company may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business, including intellectual property infringement claims.

Related Party Transactions

• Sales to Xiaomi, a strategic partner and shareholder, accounted for 82.7% of net revenues in 2024 (RMB1,752.2 million or US$240.1 million).
• Accounts receivable from Xiaomi increased significantly to RMB591.2 million (US$81.0 million) as of December 31, 2024.
• Purchased RMB13.5 million (US$1.9 million) of products and services from Xiaomi in 2024.
• Recognized RMB13.5 million (US$1.8 million) in commission fees and other expenses to Xiaomi in 2024 for selling Viomi-branded products on Youpin.
• Mr. Xiaoping Chen, founder, chairman, and CEO, controls and operates the divested IoT@Home business, which could create potential conflicts of interest.
• The company entered into a loan agreement with Foshan Viomi (controlled by Mr. Chen) on July 1, 2024, to lend US$20.0 million for working capital, fully collected by December 31, 2024, with 4.0% annual interest.
• Guangdong Lizi repaid a RMB10.0 million loan from Foshan Viomi on November 28, 2024, which had a 4.8% annual interest rate.

Stakeholder Impact

• Shareholders: Potential for increased value due to profitability turnaround and special dividend, but also face risks from high customer concentration, internal control weaknesses, and uncertainties in PRC regulatory environment.
• Employees: Ongoing investment in R&D and strategic focus may offer stability and growth opportunities, but the company's ability to attract and retain skilled personnel is crucial.
• Customers: New product launches and focus on home water solutions aim to enhance user experience and meet demand for cleaner water, but product defects or service failures could negatively impact satisfaction.
• Suppliers: Supply chain risks, including shortages and price fluctuations, could affect the company's ability to meet production requirements and customer orders.
• Creditors: Improved financial performance and liquidity may enhance creditworthiness, but increased accounts and notes payable could be a point of attention.

Next Steps

• Continue investing in research and development for AI and other emerging technologies in home water solutions.
• Strengthen brand awareness and educate consumers about smart water purification products.
• Optimize sales channels and expand global footprint, including through international franchises and agents.
• Maintain and potentially expand mutually beneficial relationships with Xiaomi, including additional product collaborations.
• Address and remediate remaining material weaknesses in internal control over financial reporting, particularly regarding U.S. GAAP expertise and accounting policies.
• Complete the transfer of websites, mobile apps, mini programs, and related materials/rights from Foshan Viomi to Guangzhou Interconnect.
• Negotiate amicably and price connected transactions with the divested business at fair market value, if business operation requires.

Key Dates

Recommendation

Viomi Technology Co., Ltd. has demonstrated a significant turnaround in 2024, achieving net income after two consecutive years of losses, driven by a strategic divestiture and renewed focus on its core home water solutions business. The growth in home water systems revenue and improved operational efficiency are positive signals. However, the company faces substantial risks, including an extremely high reliance on Xiaomi for revenue, persistent material weaknesses in internal financial controls, and ongoing uncertainties related to the PRC regulatory environment and VIE structure. While the special dividend is a positive gesture, the mixed financial signals (e.g., declining gross margin) and the inherent risks warrant a cautious approach. Investors should monitor the company's progress in diversifying its customer base, strengthening internal controls, and navigating the complex regulatory landscape in China before considering a stronger position.

Keywords

Home Water Solutions, Smart Home Appliances, IoT, AI Technology, Water Purifiers, Consumables, Xiaomi Partnership, SEC Filing, Financial Results, China Market, Corporate Reorganization, VIE Structure, Nasdaq Listed, Risk Factors, Supply Chain, E-commerce, Research & Development, Corporate Governance