Event: The company announced its 2022 results: revenue -8.7% year on year to 3.09 billion yuan; gross profit +0.4% year on year to 1.42 billion yuan; net profit -4.3% year on year to 450 million yuan. It is proposed to pay a dividend of HK32 cents per share for the full year, with a dividend ratio of 74.3%.

Comment: The epidemic has repeatedly affected the retail environment. Online performance is better. Offline companies provided 83.7 million yuan in rebates to dealers to reduce revenue. Revenue in the second half of the year fell 16.6% year on year, and annual revenue fell 8.7% year on year.

~ By brand, under the revenue difference confirmed by the wholesale model, the decline in the main series was less than that of light commerce, and the revenue of the main series fell 6.8% year on year; the light business series self-operated stores were mainly located in Tier 1 and 2 cities and were more affected by the impact of the epidemic. Therefore, although unit prices increased by an average of 15-20%, annual revenue fell 16.0% year on year.

~ Looking at each channel, online is superior to offline, with online traffic falling slightly by 0.4% throughout the year.

Retail sales declined 6% throughout the year, and the 22Q3/22Q4 turnover split +low units/ -23%.

Affected by the rescheduling of inventory provisions, annual gross margin increased 4.1ppt to 46.0%. Due to the transformation of the main series in 2021, an inventory provision of 120 million yuan was calculated, and an inventory provision of 80 million yuan was set back in 2022. Excluding the impact of inventory provision and sales rebates, gross margin increased by about 1.2ppt to 46.7%.

Under the negative operating leverage effect, the sales expense rate/management expense ratio increased by 2.1ppt/0.7ppt to 25.7%/5.8% respectively.

Inventories returned to a healthy level, and inventory value at the end of the period fell 1.0% year on year to 890 million yuan. The inventory volume of the main series increased slightly at the end of the period due to the impact of early stocking during the 2023 Spring Festival earlier than previous years, and the impact of the shift to consignment sales. In the channel inventories of the main series distributors at the end of the period, the inventory level of spring products was high, and the rest of the season's products were at a healthy level. The light business series continued to improve inventory by adjusting purchasing volume and increasing Ole store clearance inventory.

Operating cash flow increased 9.2% year over year to 650 million yuan, and book cash at the end of the period was 960 million yuan.

The impact of the epidemic has slowed down store opening plans, with 89 stores closed during the year; channel optimization continued to be promoted, 50 stores were moved to Tier 1 and 2 cities, and the renovation of about 300 stores was completed, and the average area of stores was raised to 153 square meters. The company plans to net open 100 stores in 2023, optimize 100+ stores, and increase the number of Ole stores as a channel for inventory clearance.

The new online retail business began to record a net profit, positioning itself to shift from inventory clearance channels to new products & hot products sales platforms.

Beginning on 22H1, the company began increasing the proportion of new products sold online, launched popular pants products during the 618 period, and launched the ultimate water-repellent down jacket on the eve of Double Eleven. Benefiting from the increase in unit prices and the increase in the share of new product sales, the gross profit of the online business increased, and the online business recorded net profit for the first time in 2022.

Supply chain capacity upgrade. The company added 7 production lines to enhance the quick reaction capacity of small orders, and the new logistics park was put into operation to help.

Our opinion: In a difficult retail environment, the three major channels have achieved net profit in 2022, the transformation has been smooth, and inventory has returned to a healthy state. Light commerce and the main series light weight have entered the battle. The target growth rate of the company's total turnover in 2023 is more than 10%. The number of units in the company's turnover increased in January-January, and since March, the turnover has been close to double-digit growth. The recovery momentum is good. Investors are advised to pay attention. We adjusted the company's profit forecast. It is estimated that China Lilang's revenue for 23/24/25 was 33.9/36.7/3.96 billion yuan respectively, +10.0%/+8.0%/+8.0% year-on-year respectively; net profit was 5.1/55/ 60 billion yuan respectively, +14.0%/+8.5%/+8.6% year-on-year respectively. The dividend was stable, and the potential dividend rate was 8.7%, maintaining the “increase in holdings” rating.

Risk warning: inventory backlog, terminal slump, expansion falling short of expectations, brand promotion falling short of expectations.