1H23 performance is in line with the performance forecast

The company announced 1H23 results: revenue of 2,263 million yuan, up 25.6% year on year; net loss due to mother of 208 million yuan, year-on-year loss, in line with the forecast of -2.2 to 180 million yuan; net loss of 227 million yuan after deducting non-net loss of 227 million yuan, year-on-year loss, in line with the forecast of -234 million yuan to 194 million yuan, in line with our expectations. 2Q23 revenue was 1,161 million yuan, an increase of 16.3% year on year; net loss for the return mother was 170 million yuan; net loss of 183 million yuan after deducting non-net loss.

Development trends

The main live e-commerce business was adjusted under pressure, and gradually repaired in the second quarter. 1H23 The main social e-commerce business was adjusted. There were relatively few anchor schedules, and revenue fell 30.6% year on year to 849 million yuan; GMV reached about 6 billion yuan, an increase of 9% over the previous year. Business was gradually recovering during the 2Q23 peak season. GMV was about 3.4 billion yuan, an increase of about 11% over the previous year. Of these, GMV during the 618 period was about 1.8 billion yuan, an increase of 17% over the previous year. We believe that the anchor schedule for the second half of the year is expected to continue to improve month-on-month, and that the main live e-commerce business may return to growth.

Focus on the growth of clothing and local lifestyle businesses, and AI can improve business efficiency. In terms of clothing, the company has built remote apparel industry chain bases in many places to form pallets, and has cooperated with hundreds of apparel industry experts. The supply chain and the two-end layout of anchors have continued to improve. The “Remote View X27” project is in the late stages of preparation. There is in-depth cooperation with more than 200 clothing brands in terms of goods. The company is expected to open before and after the Asian Games. We believe that after opening, it is expected that the flow of goods in the clothing supply chain will be accelerated, and that the clothing supply chain business will contribute significant revenue growth to the company. In terms of local lifestyle, 2Q23 has made efforts to develop the local lifestyle business, and has achieved a leading position in the Douyin local lifestyle celebrity delivery field. We believe that the company continues to improve its delivery categories, build a supply chain system for all categories, and is expected to gradually release growth space. In addition, the company is actively exploring AI business empowerment, developing a remote viewing cloud AIOS system to make the live streaming process intelligent; collaborating with Xiaobing to develop virtual humans; and training AI models for self-operated clothing brands. We believe that the company's AI layout is expected to improve the utilization efficiency of operators and anchors, release the production capacity and value of anchors at all levels, and help reduce costs and increase execution efficiency.

Profit pressure is under pressure due to new business investment and business adjustments, and attention is being paid to the gradual improvement of profits. At 1H23, gross margin fell 19.6ppt to 3.7% year on year, mainly due to: 1) the net profit margin of social e-commerce services fell by 23.3 ppt year on year due to a decline in output but an increase in personnel costs in the main live streaming business, and investment in local lifestyle businesses with low gross margin; 2) the revenue and share of advertising agency business with low gross margin increased sharply. The management fee rate increased by 0.9 ppt to 9.7% year-on-year, mainly due to the company's investment in manpower and material resources to support the construction of a supply chain platform, and equity incentives and amortization expenses of 33.11 million yuan. In addition, losses in the footwear industry and investment in AI R&D are also hampering profits. We believe that with the gradual recovery of the company's main business and the beginning of investment and output after the opening of the X27 project, the company's profitability is expected to gradually improve in the second half of the year.

Profit forecasting and valuation

Considering that new business investment is dragging down profits, net profit for 2023/2024 was lowered from 51/730 million yuan to loss of 150 million yuan/profit of 3.1 million yuan. Maintaining the outperforming industry rating, considering that 2023 is in the business investment period but output is still yet to be released, switch the valuation to 2024, lower the target price by 45.5% to 12 yuan, corresponding to 35 times P/E in 2024, with 16.1% upside. The current price corresponds to 31 times the 2024 P/E.

risks

GMV growth is slowing down, supply chain business expectations are low, and the distribution of value in the live streaming industry chain is changing.