The current situation of the company
O'Shudan reported 1QFY24 sales: revenue rose 20.2% year-on-year to 500 million euros (24.5% year-on-year at fixed exchange rate), slightly lower than we expected. Year-on-year growth in sales at a fixed exchange rate: sub-brands: 1) SDJ grew by 171 per cent; 2) ELEMIS grew by 24 per cent (28 per cent in the UK and 20 per cent in the US); and 3) LeP grew 4.4 per cent (excluding Russian business), thanks to 29 per cent growth in China. Sub-region: 1) 58% growth in the Americas 2) benefit from 36% growth in China, 11% growth in APAC, 3) increase in EMEA (+ 6.4%, excluding Russian business + 17%). Sub-channels: wholesale and other channels, online and retail increased by 51%, 24% and 3.5% respectively.
Comment
Management said at the performance meeting: 1) sales performance since July: LeP growth continues the trend of 1QFY24, and ELEMIS growth exceeds 20% strong triple-digit growth. Growth in APAC (including China), the United States and Europe continues the 1QFY24 trend. 2) LeP 1QFY24 China sales grew 29% year-on-year at a fixed exchange rate, but the growth rate slowed since June (50% growth in April-May), affected by a lower-than-expected recovery in overall consumption; sales in the United States were basically flat, while Japan and EMEA declined slightly (withdrawing from drugstore channels to maintain brand image). 3) ELEMIS 1QFY24 China sales increased by about 300% year-on-year (6% of brand revenue). The company will continue to invest in China for 1-2 years to increase ELEMIS local sales. Based on a consensus on price discipline, the company resumed supply to discounted e-commerce companies in the UK. 4) the strong growth of SDJ has benefited from the expansion of the region (entering the Southeast Asian market in June), categories and channels, with the planned launch of sunscreen products in FY25 and the launch of hair care products. 5) FY24 plans to add an additional 100 million euros in marketing investment, most of which will be realized in 2Q-3QFY24 due to seasonal sales. Of the 100 million euros, 76 million euros is a pure marketing budget, including 43 million euros allocated to LeP in China (mainly social media and KOL) and 13 million euros to ELEMIS,2000 in China to other regions. 6) the company maintains FY24 financial guidelines, with revenue growth of 17% at fixed exchange rates and 12% OPM.
Profit forecast and valuation
Taking into account the fluctuations in revenue growth in the Chinese market, we lowered our revenue forecasts for FY24 and FY25 by 3 per cent to 2.4 billion euros and 2.8 billion euros, and our net profit forecasts for FY24 and FY25 by 3 per cent and 4 per cent to 229 million euros and 312 million euros. Based on the company's clear medium-and long-term growth prospects, we maintain an outperform industry rating and target price of HK $24 (15 per cent upside over the current share price), corresponding to 18 times FY24e price-to-earnings ratio. The current share price is HK $20.95, corresponding to 15 times FY24e and 11 times FY25e's earnings.
Risk
The amount of ELEMIS is lower than expected; the epidemic situation of COVID-19 is repeated; the risk of exchange rate fluctuation.