Incident Overview

23H1's revenue/net profit/net profit after non-attributable net profit/net operating cash flow was 10.96/0.47/0.37/ -0.09 million yuan, respectively, a year-on-year decrease of 2.6%/9.2%/18.5%/-93.8%. However, the decline mainly came from clothing agency business other than the main menswear business and increased promotion investment in the menswear business.

The sharp increase in net operating cash flow was mainly due to a decline in accounts receivable.

23Q2 Company revenue/net profit attributed/net operating cash flow was 4.41/0.15/0.08/-0.16 billion yuan, respectively, down 8.5%/29.1%/64.0%/-21.6% from the previous year, down 2.5%/36.7%/67.8%/-66.5% from 21Q2.

Analytical judgment:

The core menswear business declined slightly, and the strategy of switching to direct management and opening stores gradually paid off. A total of 600,000 zero-feeling shirts were sold. (1) In 23H1, the company's apparel/printing/dyeing/fabric/other business revenue was 10.12/0.28/0.06/0.3 billion yuan, up 0.6%/-12.1%/-85.8%/-16.1%; in the clothing business: HoDo menswear/branded clothing achieved revenue of 767/245 million yuan, a year-on-year increase of -2.4%/11.3%; (2) Looking at channels, online/offline revenue was 265/747 million yuan, up 5.9%/-1.2% year on year. 23H1 had a total of 922 stores (414/508 directly managed/franchised), and the total number of H1 stores remained unchanged (15/-15 directly managed/franchised), compared to 8 stores (directly/franchise - 20/28). Although not many stores were opened in the first half of the year, the company still targets a net increase of 200 in the second half of the year. (3) The company accelerated its transition to direct management strategy. A total of 16 companies in 23H1 achieved transformation, an increase of 2 companies over the same period last year. Direct management/franchise revenue was 235/164 million yuan, up 15.3%/-11.4% year on year. The estimated half-year direct management/franchise store efficiency was 57.32 million yuan, up 9.7%/-6.6% year on year. Compared with 21H1, up 14%/-25%, direct-run store efficiency surpassed pre-epidemic levels. (4) Since the company's strategic transformation into comfortable menswear, it has introduced items such as Plus 1 Pants, Elite Polo, Magic T, and 0 Feel Shirts. Driven by increased brand power, accelerated entry into the core position of the business district has taken advantage, and locked in major customers and the pace of opening stores in the market.

Under the quality strategy, gross margin increased, and the increase in the cost ratio during the period led to a decline in net interest rates. (1) The gross profit margin of 2023H1 was 37.20%, up 1.31 PCT year on year, and online/direct management/franchise gross margin was 51.20%/60.33%/25.14%, respectively, up 3.62/2.72/-6.32 PCT year on year. By brand, HoDo menswear and OEM apparel were 47.50%/11.12% respectively, up 4.77/-7.73 PCT over the previous year. (2) 23H1's net interest rate was 4.28%, down 0.31 PCT from the previous year. Looking at the expense ratio, the sales/management/finance/R&D expense ratio increased by 1.08/0.08/0.40/0.32PCT year on year to 26.26%/9.37%/1.29%/1.20%. The increase in R&D expenses was mainly due to the company's expansion of the R&D team; credit impairment loss/ revenue fell 1.15 PCT year on year, mainly due to the recovery of bad debt losses due to accounts receivable; the share of other revenue increased 0.69PCT to 1.63%, mainly due to the increase in the subsidiary Jiaxing Hongdou “one incident, one development incentive fund”; income tax rate The year-on-year increase was 0.21PC to 6.05%; the total share of investment income, fair value changes, asset impairment losses, asset disposal income, and non-operating income decreased by 1.02 PCT. (3) 23Q2 The company's gross margin was 37.15%, up 1.8PCT year on year, net interest rate was 3.51%, down 1.01PCT year on year. The decline in net interest rate was mainly due to a year-on-year increase of 4.69PCT (sales/management/finance/R&D expense ratio increased by 3.94/-1.03/0.51/1.27PCT to 31.56%/8.11%/1.32%/1.69%/1.69%); the share of other revenue increased by 3.09PCT; the total share of impairment losses decreased by 1.78PCT; investment income, The total share of income from changes in fair value, income from asset disposal, and net non-operating income decreased by 1.34 PCT; the total share of taxes and surcharges, income tax rates, and minority shareholders' profit and loss increased by 1.57 PCT. (4) Among the subsidiaries, 23H1 Wuxi Hongdou Weaving/Jiaxing Hongdou Equity Investment/Wuxi Hongdou International Trade/Wuxi Hongdou Sports Technology/Hongdou Group Finance Co., Ltd. /Jiangsu Afoco Loan's net profit was 188/1208/674/714/5217/23.11 million yuan, respectively, a year-on-year increase of -79%/47%/90%/108%/-5%/27%.

Accounts receivable are reduced and inventory is manageable. By 2023H, the company's inventory was 190 million yuan, up 19% year on year and 25% higher than at the beginning of the year. The number of inventory turnover days was 45 days, an increase of 11 days over the previous year. Accounts receivable amounted to $572 million, a year-on-year decrease of 13%, and the number of accounts receivable turnover days was 104 days, an increase of 8 days over the previous year.

Investment advice

We have analyzed that (1) the company uses systematic comfort to promote channel upgrades and create a comfortable menswear store image. Strategically, the company first creates a model city in its base in Wuxi and replicates and promotes it to the whole country; (2) the company aims to open 200 stores in the second half of the year; since the company cooperated with Junzhi Consulting, it has positioned classic and comfortable menswear, and has launched popular new products one after another. The company has launched its first zero-feel shirt sales volume in the industry, and is expected to launch other products one after another in the future. (3) In February '23, the company announced that it plans to increase no more than 1.18 billion yuan to upgrade experience stores, build e-commerce centers, and build R&D center projects. Maintaining the previous profit forecast, the 23/24/25 revenue forecast of 3,055/38.76/4.556 billion yuan, maintaining the 23/24/25 return net profit forecast of 1.02/1.53/198 million yuan, corresponding to the 23/24/25 EPS of 0.04/0.07/0.09 yuan, and the closing price of 3.06 yuan on August 25, 2023, corresponding to PE of 69/46/36X, respectively, maintaining the “increase in holdings” rating.

Risk warning

There are risks such as the risk of recurrence of the epidemic; the risk of restoration of offline store efficiency; systemic risks; planned increases have not yet been completed, and there are risks such as uncertainty.