The company published its 2022 semi-annual report, and the performance was in line with expectations. 1) The company achieved operating income of 46.031 billion yuan in the first half of 2022, an increase of 17.36% over the previous year, achieved net profit of 408 million yuan, an increase of 34.09% over the previous year, and the company achieved 384 million yuan of non-net profit deducted from the mother, an increase of 38.62% over the previous year. 2) The company achieved operating income of 21.994 billion yuan in the second quarter of 2022, an increase of 19.68% over the previous year, and achieved net profit of 208 million yuan to the mother, an increase of 41.09% over the previous year, and net profit of 236 million yuan after deduction of non-net profit to the mother, an increase of 37.55% over the previous year. The increase in both revenue scale and profitability is mainly due to the company strengthening its own brand building, continuously making new breakthroughs in core capabilities such as new retail operations and online and offline business linkage, and further increasing the company's revenue and profit scale.

New retail & omnichannel core capabilities continue to break through, empowering partner brands to achieve value improvement. By industry, digital distribution/digital retail/other business revenue was +14.54%/24.21%/82.71% year on year, accounting for 69.83%/29.99%/0.18% of revenue. The share of digital retail business increased further (28.33% in the same period last year); by product, revenue from communication products/non-communication products/other businesses increased 20.61%/-9.17%/82.71% year on year. In the first half of the year, the company took multiple measures to continuously improve its core operating capabilities to provide online and offline integrated online and offline, closed-loop services and new retail experiences before and after sales to users of brands such as mobile phones, digital devices and FMCG products. Among them, the number of Apple authorized stores and outlets reached 2,800+, and the channel scale reached a new high. Joint operation of public and private traffic helped Coodoo double the scale of new retail; Honor's strategic partnership was further deepened, the quality of market operations was improved, and service capabilities were fully upgraded. At the same time, the company reached C-end users through online omni-channels, helping Honor greatly increase its retail market share. With the support of Axalta's strong sales and service network, Apple's Honor brand value has further increased. According to IDC data, the 2022Q2 Apple phone shipped 9.5 million units, an increase of 0.1% over the previous year, and Honor phones shipped 13.1 million units, with a market share of 19.5%, an increase of 10.7 pct over the previous month, successfully reaching the top of the domestic market.

Focusing on improving operating efficiency, cost management and control capabilities have been strengthened, and profit levels have steadily increased. In the first half of the year, the company firmly established a leading efficiency strategy, strictly controlled core indicators, and effectively enhanced the company's cost competitive advantage. In the first half of the year, the company insisted on steadily advancing the mobile phone distribution business. The retail business progressed steadily, achieving a gross profit margin of 3.02%, the same as the previous year, which remained stable. The company's expenses rate for the first half of 2022 was 1.79%, a year-on-year decrease of 0.06 pct. Among them, the sales/management/R&D/finance expense ratio changed +0.02/-0.08/+0.00/+0.00pct, respectively. Among them, the increase in the sales expense ratio was mainly due to the company's active channel expansion while increasing labor costs due to the expansion of sales scale during the reporting period; the reduction in financial expense ratio was mainly due to the company's operational efficiency improvement and exchange loss reduction. Under the combined influence, the company's net profit margin after deducting non-return income was 0.83% in the first two quarters of 2022, an increase of 0.13pct over the previous year. We expect future optimization of the company's revenue structure combined with the development of its own brand, and the profit level is expected to rise further.

Product category expansion has shown results, and private brands have achieved phased development goals. The company continues to build transaction service capabilities for all categories of e-commerce platforms, promote licensing and operation of various other brands on Tmall, and at the same time increase the sales volume and profitability of authorized brand products through horizontal expansion of sales channels. Positive progress was made in expanding product categories in the first half of the year. The team reached product cooperation in categories such as digital and small household appliances. Currently, they have become important partners for brands such as Jimi, Borregke, JBL, SKG, etc., and the product range has been further enriched. At the same time, the company built its own brand capabilities around consumption upgrading and promoted industrial upgrading. In the first half of the year, the private brand matrix continued to be rich, quality continued to improve, and product competitiveness was gradually established. Private brand sales have exceeded expectations, and the goal of phased development of private brands has been achieved. Among them, online sales of the smart care product “ROZU/Rongzun” reached a record high, and the smart health product “UOIN/Pomelo Print” achieved profit while having richer SKUs. The new tea brand “Cha Xiaokai” products have covered 20,000 sales outlets.

Maintain profit forecasts and maintain “buy” ratings. The company focuses on the fields of 3C digital, FMCG, liquor and new energy vehicles with mobile phones as the core, and has established strategic partnerships with many outstanding brands at home and abroad. Relying on a mature channel system and years of consumer insight, the company actively lays out its own brand matrix and continuously achieves industrial upgrading. It is expected that new consumer tracks and breakthroughs in overseas markets will continue to drive performance growth. We maintain our profit forecast. We expect the company's EPS for 22-24 to be 0.93/1.15/1.44 yuan respectively, and the corresponding PE will be 11/9/7 times, maintaining the “buy” rating.

Risk warning: mobile phone sales fall short of expectations; the pandemic has repeatedly affected offline business; new brand expansion falls short of expectations.