Matters:

The company achieved revenue of 3.682 billion yuan (-20.36%) in 2022, and its net profit fell 43.98% year-on-year to 729 million yuan. After deducting non-recurring profit and loss, it was $613 million (-50.88%). Non-recurring gains and losses are mainly gains and losses from changes in fair value and investment income of $128 million ($163 million as of Q3). eps (basic) = 1.82 yuan. If 10 shares are distributed 10 yuan (tax included), no bonus shares will be distributed; a total cash dividend of 400 million yuan will be distributed.

Sales expenses in 2022 were +16.76% to 1,422 million yuan, sales expense ratio was 38.63%, +12.28 pct; management expenses -4.99% to 164 million yuan, management expenses rate 4.46%, +0.72 pct; R&D expenses were 18 million yuan, R&D expenses rate 0.49%, +0.12 pct; financial expenses fell 16.89% year-on-year to 102 million yuan, financial expenses ratio 0.58%, +0.02 pct, remained stable. 2022Q4's single-quarter revenue fell 47.29% year on year to 639 million yuan, and net profit of the mother fell 113.9% year on year to -43 million yuan (-20 million yuan after deduction).

The sales expense ratio increased by 22.98 pct to 53.9% in a single quarter, the management expense ratio increased by 3.04 pct to 6.64%, the R&D expense ratio increased by 0.39 pct to 0.96%, and the financial expense ratio increased by 1.1 pct to 1.46%.

2023Q1's revenue was 705 million yuan, down 42.27% year on year, and Guimu's net profit fell 73.15% year on year to 101 million yuan. After deducting non-recurring gains and losses, it was $0.5 billion. Non-recurring gains and losses are mainly profit and loss from changes in fair value and investment income of $66 million. eps (basic) = 0.25 yuan. Sales expenses increased 1.94% year-on-year to 344 million yuan, sales expenses ratio was 48.78%, +21.16 pct; management expenses were +12.62% to 0.44 million yuan, management expenses rate 6.27%, +3.06 pct; R&D expenses rate 0.77%, +0.44 pct; financial expenses increased 296.45% year-on-year to 0.06 billion yuan, financial expenses rate 0.79%, +1.03 pct.

Commentary:

Total retail sales of gold, silver, and jewelry per unit above the social zero limit in 2022 were 301.4 billion yuan, down 1.1% from the previous year. Combined with the high base figure of the previous year, this shows the strong resilience of the jewelry industry. According to the China Jewelry and Jade Industry Association, the domestic diamond products market size in 2022 was 82 billion yuan (-18%). Compared to other categories, diamond-encrusted jewelry experienced difficulties when consumption scenarios were relatively limited and customer unit prices were high, and the jewelry industry also began to differentiate at an accelerated pace. According to Euromonitor International, the domestic jewelry industry CR10 was close to 30% in 2022 (only 17.2% in 2016).

In 2022, the company accelerated the penetration of key city layouts, opening 254 new stores and closing 27 stores, a net increase of 227. By the end of 2022, the number of company stores was 688 (461 at the end of the previous year), and there were 686 domestic stores. Tier 1 and 2 cities accounted for 65.45%, with 449 stores. Of the revenue of 3.682 billion yuan in 2022, the offline direct business contributed 2,980 million yuan (-18.87%, the total number of stores suspended or shortened business hours throughout the year reached 9940 days), and the online self-operated business accounted for 395 million yuan (+-34.07% compared to the previous year, mainly because the product structure was adjusted and optimized at the beginning of the year, and some low-diamond engagement diamond ring products were removed. The average customer unit price of the official website increased 75% to 6,300 yuan year-on-year in 2022), and offline joint venture revenue was 275 million yuan. The company's net profit to the parent company in the fourth quarter was negative. On the one hand, the external environment affected a lot of revenue. On the other hand, there were changes in the fair value of financial assets due to factors such as financial policy adjustments and changes in market expectations for the economy. In addition, some stores calculated impairment losses.

After operations were affected by the environment and additional stores were added, the company's directly-managed stores had a single store revenue of 5,742 million yuan (-43.57%), a single store gross profit of 4,0717 million yuan (-43.90%), and a single store floor efficiency of 63,300 yuan (-45.27%); single store revenue, gross profit and ping efficiency of joint stores were 5,616,600 yuan (-42.38%), 3,838,400 yuan (-43.49%), and 82,200,000 yuan (-42.63%), respectively.

Investment advice: Although the company's operations have been affected by the environment since listing, the company has always insisted on “expression of love” as its original intention and built core competitiveness around the strategic positioning of “brand+channel+product”; in the domestic market, companies have also seized the changes in the new retail era and created an omni-channel DTC operating model through mobile Internet to fully integrate new media resources to convey brand content to consumers; in addition, the company attached great importance to product design, process and quality, and continued to invest in informatization construction and investment. After listing, the company also continued to focus on introducing and cultivating high-level talents and continued to promote organizational change. Based on the development of the industry and changes in the environment, we adjusted the company's performance forecast. It is estimated that the net profit attributable to the mother in 2023-2025 will be about 79, 9.5 and 1.08 billion yuan respectively. Considering the current market environment, referring to the valuation level of comparable companies in the industry, we gave the company 25 times the PE valuation in 2023, corresponding to the target price of 50 yuan. Maintain a “Recommended” rating.

Risk warning: Fluctuations in the economic and market environment; further decline in marriage rates; expansion falls short of expectations; marketing strategies go wrong; prices of raw materials continue to rise, etc.