1HFY22 performance is in line with previous performance forecasts

The company announced 1HFY22 results: revenue of 850 million yuan, up 4.6% year on year; Guimu's net profit loss was 750 million yuan, down 167% year on year, in line with previous performance forecasts.

Sales of the Kappa brand remained flat year over year, and the share of shopping malls and Ole sales increased. 1HFY22Kappa's big packaging revenue was 750 million yuan, down 0.1% year on year. Among them, offline and online channel sales revenue was +1.5%/-6.9%, respectively, and corresponding revenue accounted for 72%/16%. The revenue of the children's clothing business was about 69 million yuan, an increase of 50% over the previous year, accounting for 8% of the group's sales. The number of units in the company's omnichannel turnover declined year-on-year. Among them, the share of shopping mall turnover increased 7ppt to 29% year over year, and the share of Ole channel sales increased 5ppt to 18% year over year. The number of Kappa oversized stores reached 1,217, a net increase of 47 over the end of FY21. Among them, shopping mall stores accounted for 31%, an increase of 3ppt over the previous year.

Losses in investment income have dragged down performance. As of the end of September 2021, the company held a total of 9.7 billion yuan in investment and cash, of which 67% was invested in financial assets. The investment division of the 1HFY22 company lost 660 million yuan (earnings of 1.24 billion yuan for the same period last year), of which 730 million yuan was lost due to changes in the fair value of financial assets, mainly due to: 1) losses of stocks and stock funds held by the company due to fluctuations in the secondary market since March 2021; 2) the valuation of comparable listed companies that reference the valuation of PE funds held by the company declined. Management said that the pace of investment slowed down in the second half of last year, pushing for the monetization of already invested products and the withdrawal of projects.

Inventory levels increased due to stocking factors and poor sales conditions, and the clothing division lost operating profit. Net inventory value increased 41% year over year to 502 million yuan, mainly due to poor sales of autumn and winter equipment goods and July-September, the number of inventory turnover days increased 16 to 278 days year over year, and the cash cycle decreased by 3 days to 180 days over year. Gross margin before inventory impairment provisions declined 0.4ppt to 65.5% year over year, mainly due to increased retail discounts due to promotional activities in response to the pandemic. The sales and management expenses rate increased 8.5ppt to 76% year-on-year, mainly due to: 1) the higher investment costs of the Kappa Show in May; 2) the increase in store expenses and sales staff expenses due to the opening of new stores; 3) the charging fee for initial rights issuance in the year; and 4) the low base of social security relief under the pandemic last year. The operating profit margin fell 248ppt to -90% year over year (after excluding the investment segment, the operating profit margin fell 17ppt to -9% year over year). Net profit margin declined 225ppt to -88% year over year.

Development trends

Management said that in October, offline sales were basically the same year on year, and from November 1 to 21, the number of offline sales units dropped from a year higher. In the future, they will do a good job in product reform and global marketing to seize opportunities through channels such as Douyin.

Profit Forecasting and Valuation

The FY22/23 EPS forecast remains unchanged at 0.05/0.11 yuan. The current stock price corresponds to 5.6 times FY23EP/e, maintaining outperforming the industry rating. Considering that the return on the company's investment business is highly uncertain, we gave a 63% valuation discount on the company's multi-business model (previously 58%). Taken together, we lowered the target price based on the segment plus the total valuation by 11% to HK$0.83, with room for 15% to rise.

risks

The epidemic has fluctuated repeatedly, the terminal retail environment is under high pressure, reforms have fallen short of expectations, and investment returns have fluctuated.