Revenue increased 3% in the first half of the year, and gross margin declined slightly due to a decline in the share of light commerce, maintaining high dividends. 20221H The company's revenue was 1.40 billion yuan, +3.2%, in line with retail growth. Among them, 50% of light commerce stores are located in East China and were greatly affected by the pandemic, partly offset by the delay in confirmation of main series consignment revenue at the end of last year. The gross profit margin was 48.7%, -0.8 percentage points, mainly due to the decline in the share of light businesses with high gross margins. In fact, with strong product competitiveness, the brand price increase ratio increased slightly. The transition from light commerce to self-management was successfully completed. The sales expenses ratio was -0.8 percentage points to 22.6%, and the administrative expenses ratio was +1.6 percentage points to 6.1%, mainly due to the increase in depreciation and renovation costs of the Creative Park. In addition, there were also preparations for impairment of receivables and light business store usage rights. Due to a decrease in gross margin and an increase in expense ratios, the company's net profit was -5.3% to 260 million yuan, with a net interest rate of 18.4%, -1.6 percentage points. Inventory/receivable turnover was +9/-14 days to 217/54 days, respectively, and inventory +68 million yuan to 8.3 million yuan respectively, mainly due to delays in the arrival of fall 2022 products in the main series. The payout rate in the first half of the year was as high as 71%, and over 70% for the past 5 years.

The results of channel transformation are beginning to show, and increased product competitiveness is expected to drive up the price increase rate. 1) In 2021, about 40% of the main series stores switched to consignment sales, and light business stores switched to self-operation, laying a solid foundation for interconnecting store inventory, strengthening inventory management capabilities, and improving store efficiency and sell-out rates. Business inventories declined in the first half of the year, and results are beginning to show. 2) Continue to use e-commerce to clean up inventory during the period, and at the same time try to develop exclusive e-commerce payments. Some products have become a hit. E-commerce in 2021-H will account for about 10% of total sales. 3) The proportion of originals in 2022 1H products remains 70%. Among them, the proportion of products developed using unique fabrics is about 50%. The proportion of original products is expected to increase to about 75% in the summer of 2022. With the continuous improvement of product competitiveness, the price increase rate for some of the company's products will increase.

The company lowered its annual retail growth target to the number of units. As the epidemic came under control from July to August, the company's retail performance was better than management's expectations. At the same time, considering the uncertain operating environment, the company lowered its annual retail growth target to the number of units (originally 10% or more). In terms of opening stores, we will continue to adopt a prudent strategy, focusing on improving store efficiency, and the net store opening target has been lowered from 50-150 stores to the same level.

Risk warning: repeated epidemics; brand image damage; channel reform falls short of expectations; systemic risks.

Investment advice: Steady operation, high dividend rate, optimistic about steady recovery in the second half of the year. Due to the epidemic containment in the first half of the year, the company's operating performance was affected to a certain extent. Since the epidemic, the company has continuously improved product competitiveness and actively implemented channel transformation. The transformation of light business stores into self-operation and the transformation of main series of consignment sales have effectively strengthened channel inventory management capabilities, laying a solid foundation for post-epidemic recovery. As performance fell short of original expectations due to the containment of the epidemic in the second quarter, earnings forecasts were lowered slightly. Net profit for 2022-2024 is expected to be 5.8/68/780 million (originally $65/ 74/850 million), up 24%/16% year-on-year. Corresponding to 7.5-8x PE in 2022, the reasonable valuation was reduced to HK$4.3 to 4.6 (originally HK$4.8 to 5.1). The company's financial performance is steady, short-term performance recovery can be expected, and a long-term high dividend rate has been maintained, maintaining a “buy” rating.