1H23 performance fell short of our expectations
The company's 1H23 revenue increased 20% to 560 million yuan, of which 2Q23 also increased 24% to 301 million yuan.
1H23's net profit increased by 3% to $0.2 billion, of which 2Q23 also dropped 75% to $3.2 million, which was lower than our expectations, mainly due to stock price reductions of $50 million during the quarter.
The Group's major customer business is driving the rapid growth of its main outdoor business. Revenue from 1H23's main outdoor business increased 18% to 540 million yuan. By brand, Pathfinder brands, TOREADKIDS, and TOREAD.X had revenue of 190 million yuan/0.3 million yuan/6.11 million yuan, compared to +30%/+38%/-3%. Discovery Expedition's revenue also fell 76% to 0.1 billion yuan. The company ended cooperation with brands and is currently in a transition phase.
By channel, 1) Offline business revenue increased 25% to $4.3 billion, of which revenue from direct management, franchise and joint venture channels, group major customer business, and others was $1.0/2.2/120 million, respectively, an increase of 8%/5%/141%, respectively. 1H23 The company had a net increase of 34 to 830 stores, including 6 to 91 direct-run stores. As the retail environment improved after the pandemic, the average store efficiency of mature stores over 12 months increased by 130%; the net opening of 40 franchise stores reached 739. 2) Online business revenue also increased 9% to 110 million yuan.
The gross margin of the outdoor main business has increased markedly, and preparations for falling inventory prices and reduced investment income have dragged down profit performance.
1H23 gross margin increased by 10ppt to 53%, of which the gross margin of the outdoor main business increased by 11ppt to 54%. We believe that sales discounts have gradually improved mainly due to the company's active price control. Thanks to operating leverage and the optimization of direct-run stores, the sales expenses ratio was reduced by 4ppt to 27%. The management expenses rate also increased by 3ppt to 13%, mainly due to increases in employee remuneration, M&A related expenses, and amortization of intangible assets. During the period, the company calculated an inventory price reduction of 50 million yuan, investment income of 5.26 million yuan (23.21 million yuan in the same period last year), and 1H23's operating profit margin also dropped by 3ppt to 2%.
The turnover efficiency of outdoor inventory has improved, and operating cash flow has improved. By the end of June, the company's outdoor product inventory balance had dropped 18%, and the number of outdoor product inventory turnover days had dropped 77 days to 274 days. 1H23 Net cash flow from operating activities was adjusted year-on-year to $0.8 billion, compared with a net outflow of $60 million for the same period last year, mainly due to increased sales repayments in the first half of the year.
Development trends
The company completed the acquisition of 72.79% of G2 Touch's shares in May and plans to further acquire 22.22% of the shares. G2 Touch began to be consolidated in June. 1H23's revenue/net profit was 0.8/0.3 billion yuan, respectively, and net profit exceeded the whole of 2022. We believe it is expected that the company's revenue and profit will increase in the future.
Profit forecasting and valuation
Maintain the company's 2023/24 EPS forecast of 0.14/0.18 yuan. The current stock price corresponds to 4.7/4.1 times the 2023/24 P/S, maintaining a neutral rating. We gave the outdoor/chip business 6.3/7.0 times P/S in 2023, and gave a 14% valuation discount to multiple business models. Overall, we lowered the target price by 3% to 8.77 yuan based on the distribution plus total valuation method, with 17% room for growth.
risks
The terminal retail environment fell short of expectations, industry competition intensified, and new business development fell short of expectations.