1H23's performance met our expectations

The company announced 1H23 results: revenue of HK$3,889 million, -11.1% year-on-year; net profit of HK$25.01 million, which turned a year-on-year loss into a profit, in line with our expectations.

The Cybex brand is growing strongly, and the GB brand is still undergoing an adjustment period.

1H23's strategic brand revenue was -2.7% year-on-year to HK$3,555 million. Among them, 1H23 Cybex brand revenue was +11.2% year-on-year to HK$1,815 million, thanks to its continuous expansion of global distribution channels, and the revenue contribution of its own e-commerce platforms launched in Europe and the US; GB brand revenue was -19.3% to HK$639 million, mainly because it is still in the product and channel adjustment period; Evenflo brand revenue was -10.4% year-on-year to HK$1,101 million, mainly because its major retailers have continued to inventory since 4Q22, but 2Q23 Evenflo brand revenue has increased rapidly- 8.7%, compared to the 1Q23 growth rate of -12.2%, which narrowed slightly from month to month.

1H23's blue-chip and other business revenue was -53.5% year-on-year to HK$335 million, mainly due to fewer orders from blue-chip customers and retailers due to inventory removal, and the company's active optimization of the product portfolio for other businesses. Similarly, the revenue growth rate for blue-chip and other businesses in 2Q23 was -29.3%. Compared with the 1Q23 growth rate of -62.1%, it narrowed slightly from month to month.

Gross margin reached a record high for the same period, and profit quality improved slightly. 1H23's gross margin was +7.4ppt to 45.9% year-on-year, mainly due to a decrease in shipping and raw material costs, an increase in the share of high-margin brand revenue, and favorable exchange rate changes. Expense rates increased due to a decrease in revenue scale. 1H23 sales/management expense rates were +2.5pp/+2.3ppt to 26.4%/18.1%, respectively; 1H23's financial expense ratio was +1.5ppt to 2.2% year-on-year, mainly due to US interest rate hikes, which led to an increase in corporate loan interest rates. Overall, 1H23's net interest rate to parent was +0.7ppt to 0.6% year-on-year.

Development trends

We expect the company to continue to increase the Cybex brand market share and increase its profit level, adjust the size of the GB brand, develop its own channels, reform distribution channels, innovate the Evenflo brand product portfolio, and continue to receive new business orders from major retailers. Furthermore, we expect 2H23's blue-chip business revenue decline to continue to narrow as customers move forward with inventory removal.

Profit forecasting and valuation

We basically maintained our 2023/24 profit forecast of HK$110/245 million. The current stock prices correspond to 8.5x/3.8x P/E for 2023/24, respectively. Maintaining a neutral rating and maintaining a target price of HK$0.66, corresponding to the company's 10.0x/4.5x P/E in 2023/24, respectively, has 17.1% upside compared to the current stock price.

risks

The recovery in overseas demand fell short of expectations, strategic brand development fell short of expectations, and there was a risk of exchange rate fluctuations.