Performance review

The 2022 results fell short of our expectations

The company announced its full-year results for 2022: revenue of 3,086 million yuan, -8.7% year on year; net profit of the mother was 448 million yuan, -4.3% year on year, lower than our expectations. Among them, 2H22's revenue was 1,688 million yuan, -16.6% year on year; net profit of the parent company was 191 million yuan, -2.9% year on year. The performance fell short of our expectations, mainly affected by adverse factors such as the epidemic, but the company still showed operational resilience.

The average price of the Light Business series has been increased, and the channel structure has been optimized and adjusted. In 2022, retail sales and revenue for the main series were -6.8% and -7.5%, respectively, and retail sales and revenue for the light business series were -16% and -14.2%, respectively. Among them, the retail unit price of the light business series increased 15-20% with product design optimization. In terms of channels, by the end of 2022, the Lilang brand had a net decrease of 89 stores to 2,644 over the same period last year, including 2,393 main series stores and 251 light business series stores. Affected by the epidemic, the company closed inefficient stores during the year, and the total area of retail stores reached -0.1% year-on-year to 404,000 square meters.

Benefiting from inventory provision rebates and product structure optimization, gross margin increased significantly over the same period last year. Gross margin in 2022 was +4.15ppt to 46.02% year on year, mainly due to the 2021 accrued inventory provision of 120 million yuan, while the 2022 inventory provision rebate was 102 million yuan. After deducting the impact of inventory provision and rebate, gross margin was +1.2ppt to 45.5% year-on-year. The sales and management expenses ratio in 2022 was +2.12 and +0.73ppt to 25.65% and 5.80% year-on-year. The increase in sales expense ratio was mainly due to increased investment in advertising and decoration. Overall, the company's net interest rate in 2022 was +0.67ppt to 14.52% year over year.

Inventory turnover naturally slowed after switching to sales, and dividends continued to be high, with a dividend rate of 8.0%. The company's inventory in 2022 was -0.96% year-on-year to 885 million yuan, and the number of turnaround days was +50 to 195 days compared to the same period, mainly because 40% of stores switched from distribution to consignment sales in 2021, and the turnaround day base was lower due to high sales costs in 2021. Furthermore, the company paid a total of 32 Hong Kong cents in dividends in 2022. The corresponding dividend rate and dividend rate were about 53% and 8.0%, maintaining a high dividend ratio.

Development trends

At the performance conference, the company plans to open 100 net stores in 2023, optimize and rectify 400 and 100 main series and light business stores respectively to increase the number of high-quality shopping center stores in provincial capitals and prefecture-level cities; online channels will continue to increase the proportion of new products and diversify the platform layout (such as Douyin). Furthermore, as the market recovers, the company expects to host a big fashion show in the second half of the year. Management expects total retail sales to increase by more than 10% in 2023.

Profit forecasting and valuation

Considering that the company's channel expansion was slower than expected in the previously unfavorable terminal retail environment, and that it still takes time to remove inventory, we lowered the 2023 profit forecast by 28.8% to 517 million yuan, and introduced the 2024 profit forecast of 581 million yuan. The current stock price corresponds to 8.1x and 7.0x P/E in 2023 and 2024, maintaining an outperforming industry rating. Taking into account expectations that the company's future performance will return to elasticity, the target price is maintained at HK$4.85, corresponding to 9.5x and 8.2x P/E in 2023 and 2024, with room for an increase of 16.9% compared to the current stock price.

risks

The development of online and light commerce businesses fell short of expectations, and the risk of inventory price declines.