Performance review
The 2022 results were higher than our expectations. The 1Q23 results were in line with our expectations that the company's revenue in 2022 would drop 8% to 1.1 billion yuan, and the net profit of the mother increased 28% to 0.7 billion yuan, which was higher than our expectations, mainly due to better gross margin performance and Beijing Xinneng's performance compensation. The net profit loss returned to the mother after deduction was 12.07 million yuan, and the profit for the same period in 2021 was 18.95 million yuan.
The epidemic has dragged down the main offline outdoor business, and online growth is good. The revenue of 2H22's main outdoor business was 19% to 670 million yuan over the same period last year. By brand: Pathfinder Brand, Discovery Expedition, TOREADKIDS, and TOREAD.X earned 580 million yuan/40 million yuan/0.5 million yuan/6.27 million yuan, -23%/+39%/-26% year on year. Looking at each channel: 1) Offline revenue fell 27% to 470 million yuan. Among them, direct management, franchise and joint ventures, group major account business and other revenue was 0.9/28/10 million yuan, compared with -10%/-10%/-57% year on year. The 2H22 company opened a net of 11 to 796 stores, of which 25 to 145 direct-run stores were closed; 36 franchised stores were opened to 651. 2) Online business revenue increased 16% to 220 million yuan.
The rebound in falling inventory prices led to a sharp increase in gross margin. 2H22 gross margin increased 21ppt to 57%, mainly because the company adjusted the cost of falling inventory prices back to costs. The sales and management expenses ratio increased 5.9ppt/4.1ppt to 26%/11% respectively, mainly due to the deleveraging of operations brought about by the merger of Beijing Xinneng and the pandemic. Asset and credit impairment losses of $110 million (loss of $0.2 billion in 2021) were mainly due to calculated inventory price reduction preparations and goodwill impairment. Revenue from changes in fair value increased profits by 50 million yuan, mainly due to Beijing Xinneng's performance compensation promises or changes in fair value in consideration, as well as changes in the fair value of other non-current liabilities confirmed with respect to sale options held by minority shareholders. The operating profit margin of 2H22 fell by 1.1 ppt to 5.5%.
The improvement in the retail environment boosted 1Q23 performance. Thanks to the continuous improvement of the retail environment since the beginning of the year and the company's continuous brand and product optimization, 1Q23 revenue increased 15% to 240 million yuan; Guimu's net profit increased 124% to 0.2 billion yuan; net profit after deduction was 0.1 billion yuan, an increase of 574% over the previous year, in line with our expectations. Gross margin increased 3.1ppt to 49%, mainly due to improved retail discounts. The sales and management expenses ratio increased 0.7ppt to 42%, and the net profit margin increased 3.7ppt to 7.6%.
Development trends
The company plans to acquire 95% of the shares of G2 Touch, a touch solution chip design company, with a net profit of 0.2 billion yuan in 2022. We expect the company's “outdoor business+chip business” dual business pattern to strengthen after the acquisition is completed.
Profit forecasting and valuation
As the retail environment and chip business are still uncertain, the 2023 EPS forecast was lowered 7% to 0.14 yuan, and the 2024 EPS forecast was introduced to 0.18 yuan. The current stock price corresponds to 5/4 times 23/24 P/S, maintaining a neutral rating. Considering the gradual formation of a dual main business pattern, the adjustment was made to a segmented plus total valuation method, giving the outdoor/chip business 6/7 times the 2023 P/S, and giving a 14% valuation discount for multiple business models. Overall, the target price was raised 15% to 9.06 yuan, with 13% room for upward growth.
risks
The terminal retail environment fell short of expectations, industry competition intensified, and new business development fell short of expectations.