Revenue fell 8% throughout the year, the overall operating situation was steady, and dividends remained high. In 2022, the company's revenue fell 8.7% to 3.09 billion yuan. Among them, Lilang's main series revenue fell 7.5% and light business revenue fell 14.2%. From this, it can be estimated that light commerce revenue accounted for 17%, and the main series accounted for 83%. Of these, 50% of light business stores were located in East China, which was greatly affected by the pandemic. The gross profit margin for the full year was 46%, +4.1 percentage points, mainly due to the calculated inventory provision of 120 million yuan in 2021 and the return of 22 million yuan in 2022, but gross margin still increased 1.2 percentage points year-on-year under the same scale, reflecting a slight increase in the brand price increase ratio. The cost rate increased 2.8 percentage points to 31.4%. Among them, light commerce reduced the share of operating expenses due to the closure of stores, but the company increased its marketing investment, and the advertising cost rate increased 2.9 percentage points to 13%. The company's net profit was -4.3% to 450 million yuan, with a net interest rate of 14.5%, +0.6 percentage points. Inventory/receivable turnover was +50/-3 to 195/54 days, respectively. The sharp increase in inventory turnover was mainly due to the low base figure due to inventory impairment calculated in 2021. In fact, it has improved 22 days from the first half of the year. The annual payout rate is as high as 76%, and has been above 70% for the past 5 years.

Channel transformation and self-management have had good results, and product competitiveness has been enhanced. 1) In 2021, 40% of the main series stores switched to consignment sales, and light commerce switched to self-operation, effectively connecting and allocating store inventory at any time to improve store efficiency and sell-out rates. Currently, the results are remarkable. For example, in 2022, the company's dropshipping stores only accounted for about 40%, but contributed 54% of revenue, light commerce inventories declined, and retail unit prices increased 15-20% year-on-year. 2) The function of e-commerce to clean up inventory has been weakened, e-commerce earmarked contributions have been actively developed, e-commerce gross margin has increased, and it has played an important role in brand drainage and image promotion. 3) The proportion of original products increased from 70% to 75% in 2022. Among them, the proportion of products developed using unique fabrics was about 50%, increasing product competitiveness.

The recent recovery trend has been positive, with a retail growth target of more than 10% in 2023. The company achieved a turnover increase of about 5% in January-January, and double-digit growth in the first half of March. The retail growth target for 2023 is 10% or more. The company plans to open 100 net stores throughout the year, including 50 light business, and rectify and optimize 400 main series stores and 100 light business stores.

Risk warning: The epidemic has repeated many rounds; brand image has been damaged; channel reforms have fallen short of expectations; systemic risks.

Investment advice: Steady operations and high dividend rates. I am optimistic that this year's low performance base will accelerate recovery. Despite the difficult operating environment in 2022, the company still achieved solid operating results. During the three-year epidemic, the company continued to improve product competitiveness and actively implemented channel transformation. Looking at the current situation, channel transformation has played a positive role in optimizing inventory control, increasing sell-out rates and store efficiency, laying a solid foundation for post-epidemic recovery. Since the impact of last year's epidemic exceeded expectations, there is still pressure to remove inventories this year. Profit forecasts were lowered. Net profit for 2023-2025 is expected to be 5.0/57/650 million yuan respectively (originally 2023/2024 was 68/780 million yuan), up 12%/14%/13% over the previous year. As the liberalization of epidemic control increased the certainty of recovery, the reasonable valuation was slightly raised to HK$4.8-5.0 (originally HK$4.3-4.6), corresponding to 10-10.5x PE in 2023, maintaining the “buy” rating.