1H23's performance met our expectations

The company announced 1H23 results: revenue of 1,401 billion yuan, +8.9% year-on-year; net profit of 92 million yuan, +254.1% year-on-year; net profit of 138 million yuan after deducting non-net profit of 138 million yuan, +173.3% year-on-year. Among them, 2Q23's revenue was 628 million yuan, +20.6% year on year; net profit loss of 0.5 billion yuan, -89.3% year on year; net profit after deducting non-net profit of 36 million yuan, +166.5% year on year. The gap between deduction and return home mainly comes from changes in fair value brought about by financial assets. The company's overall performance is in line with our previous expectations.

The channel structure continues to be optimized, and the efficiency of main brand stores has been greatly improved. By brand, 1H23's main brand revenue was +12.6% to 1,248 billion yuan, mainly due to the increase in the number of transactional customers brought about by the resumption of offline traffic. We expect the company's store efficiency to increase by more than 20% year-on-year. The number of brand stores during the period decreased by 34 to 2170 compared to the beginning of the year, but the overall operating area increased slightly, with an average single store area reaching 155 square meters. The proportion of the company's shopping centers and Ole stores continues to increase, and the number of ten-generation stores is close to 1000.

Additionally, Fun and Ziozia's revenue was -32.4% and +9.39%, respectively. By channel, the company's online revenue was +15% to 166 million yuan, and offline direct management and franchise revenue were +14.5% and +4.3%, respectively, to 563 million yuan and 591 million yuan. All channels achieved relatively good growth.

Discount control drives an increase in gross margin, and investment income affects net profit. 1H23's gross margin was +3ppt to 63.7% year-on-year, mainly due to increased terminal discounts. The 1H23 sales expense ratio was -6.3ppt to 34.3% year-on-year, thanks to a reduction in advertising and decoration costs. The management and R&D cost rates are relatively stable, with +0.9 and -0.2ppt to 9.1% and 1.6% year-on-year, respectively. Furthermore, 1H23's fair value changed by -98 million yuan year over year. Overall, 1H23's net interest rate to parent was +11.3ppt to 6.6% year over year, after deducting non-net interest rate +5.9ppt year on year.

Inventory turnover accelerated, and cash improved significantly year over year. 1H23 inventory was -5.1%% year over year to 784 million yuan, inventory turnover days were -23 days to 286 days year over year, and accounts receivable turnover days were -2 days to 21 days year over year.

Net cash flow from operating activities was 239 million yuan, a significant improvement from 1H22's $013 million.

Development trends

With the continuous optimization of the company's channel inventory and the introduction of a low base, we expect the company's performance in the second half of the year to be superior to that of the first half of the year, while keeping the goals announced at the beginning of the year unchanged throughout the year in accordance with the company guidelines.

Profit forecasting and valuation

We keep our profit forecast for 2023/24 unchanged. The current stock price corresponds to 19x/14xP/E for 2023/24, maintaining an outperforming industry rating. Considering the central correction in industry valuations, we lowered our target price by 12.9% to 12.91 yuan, corresponding to 25x/18x P/E in 2023/24, which has 31.6% upward space compared to the current stock price.

risks

Terminal demand has recovered less than expected, marketing investment has exceeded expectations, and there is a risk of loss of investment.