Blue Moon reported a net loss of HK$167m, higher than our expected net loss of HK$84m, due to 21% revenue miss and 3.3ppt GP margin miss on additional discounts given certain KA client and reduced sell- in to distributor channels for channel inventory optimisation. This was partially mitigated by operating cost and tax savings and higher-than- expected interest income. However, seeing revenue and net profit reverted to 32% and 60% YoY growth in July, mgmt. remained positive in improving operating prospects in 2H23, coped with step-up in new product launches. We believe uncertainties in both revenue and margin remain high and maintain HOLD.

Key Factors for Rating

2H23 and 2023 outlook. Despite weak sales in 2Q23 (mainly April/May), mgmt. remained positive on operating prospects in 2H23, the usual sales peak season for the company. Mgmt. indicated that revenue and net profit reverted to 32% and 60% YoY growth in July. Mgmt. believed that channel inventory at distributor channel has reverted to healthy level, underpinning accelerated sell- in in 2H23. Mgmt. aims to drive sales growth on the back of channel expansion (under an O2O model) and new product launches. For instance, it launched its body wash product "Jing Xiang" in July 2023, further enriching its product offerings. It intends to increase the number of distributor to about 2,000 by end-2023, from 1,700 as of end-June 2023. For e-commerce, it tapped into emerging platforms (e.g. Douyin) to capture the rising consumer demands there. Mgmt. expects likely GP margin expansion in 2H23, on softened raw material prices. Besides, deep discounts to certain KA client is no longer a drag for both GP margin and revenue in 2H23. That said, we expect rising operating costs for promoting new products might partially offset the GP margin benefit.

1H23 results miss. Revenue declined by 23% YoY in 1H23, 21% below our expectation, due to RMB depreciation (c.7%) and weaker-than-expected offline sales. KA channel and distributor channel sales dropped by 59% and 41%, due to deep discounts provided to certain KA account and weak demand from distributor given high channel inventory and tight cash. Online sales recorded 2% YoY decline (or 6.4% growth, ex FX) in 1H23. GP margin expanded by 2.2ppt YoY to 55.2%, thanks to softened raw material prices (ie LDPE and palm oil), offset by deepened discounts to certain KA account. Distribution cost to sales ratio rose 7.8ppt YoY, due to operating deleverage. Admin expense to sales ratio increased by 6.9ppt YoY, due to rising staff cost (on additional hire of R&D staff and wage inflation). As a result, the company recorded an operating loss of HK$422m in 1H23 (with OP margin of -19%), compared with an operating loss of HK$104m in 1H22 (with OP margin of -3.6%).