Description of the event
The company disclosed its three-quarter report for 2023. In the first three quarters, it achieved operating income of 1,742 million yuan, a year-on-year decline of 42.75%, net profit of 74.14 million yuan, a year-on-year decrease of 90.4%, net loss of 67.55 million yuan, a year-on-year decrease of 110.66%. Of these, net income for the third quarter achieved an operating income of 500 million yuan, a year-on-year decrease of 47.77%, and net profit of 20.73 million yuan, a year-on-year decline of 89.31%.
Incident comments
Against the backdrop of weak mosaic demand, the company took the initiative to adjust low potential energy stores. The decline in revenue stages+the relative rigidity of some expenses put pressure on the performance side. The company's Q1-Q3 revenue for the single quarter fell by 42.3%, 37.9%, and 47.8%, respectively, and the Q3 revenue decline increased month-on-month, mainly due to the structural differentiation of the jewelry industry. On the other hand, the number of domestic marriages in Q1-2 was 215 and 1.78 million, respectively. Compared with the two-year compound growth rate of 0.4% and -6.4% in the same period in 2021, there was limited compensation in the wedding scene, resulting in insufficient consumer demand for diamond-studded jewelry. The gross profit margin for the third quarter alone was 68.16%, down 2.82 pct year on year, and the decline increased 1.42 percentage points month-on-month, or mainly due to adjustments in the terminal product structure under pressure on the sales side. On the cost side, the Q3 sales expense ratio was 54.8%, Q1-3 increased by 21.2, 27.0, and 11.9 percentage points year-on-year respectively, the Q3 management expense rate was 7.0%, and Q1-3 increased 3.1, 1.8, and 2.2 percentage points year-on-year respectively, or mainly because the company focused on improving store management quality and profitability in the first three quarters and actively carried out channel adjustments: Q1-Q3 opened 8, 7, and 4 new stores respectively, closed 9, 18, and 86 stores respectively. After a total of 94 stores closed in the first three quarters, the number of existing stores was 594 The households are all self-operated; while Q3 store closures accelerated month-on-month, some sales and management expenses were relatively rigid, so the cost rate increased passively. In the store optimization and adjustment stage, the company prepared a total of 76.57 million yuan for asset impairment in the first three quarters based on anticipated credit losses on financial assets such as accounts receivable and non-current assets due within one year, including credit impairment losses of about 8.1 million yuan and impairment losses of inventory/long-term amortization expenses/right of use assets of about 68.47 million yuan. On the profit side, net profit for Q3 was 20.73 million yuan, compared to 194 million yuan for the same period last year. After excluding investment income such as bank financial management, Q3 deducted net loss of 18.19 million yuan, compared to 143 million yuan for the same period last year.
The company adheres to a high-end brand position, expands consumption scenarios with wedding rings as the main category, and further strengthens its unique brand image. DR, a powerful brand owned by the company, uses wedding ring as an entry point to serve users' true love for a lifetime. It focuses on the three business scenarios of proposal, marriage, and anniversaries, and lays out core categories such as diamond proposal rings, wedding rings, and anniversary gifts to create a unique brand image of “love one person for a lifetime”. By the end of the reporting period, the company had a total of 374 direct-run stores in Tier 1 and 2 cities, accounting for about 63.18% of the number, continuously increasing its brand influence in mid-tier and high-end cities. Against the backdrop of fluctuations in wedding demand and inlay categories, the company still adheres to the unique position of the brand, adheres to the middle and high-end channel layout, and the continuous deepening and consolidation of product content and service quality. The brand value built in this way forms the core competitiveness of the long-term brand.
Investment suggestion: The company accurately grasps the attributes of diamond jewelry as an emotional carrier and deeply binds the loyalty of love to its own brand products. With the gradual optimization of stores with low potential energy, the profitability of the direct-run store system is expected to improve. In the medium to long term, the decline in the number of marriages may slow down, and there is a possibility that demand for mosaic will pick up and grow. The company is expected to occupy a stable position in the market with full direct management, high standardization, and efficient operation capabilities. We expect the company's net profit from 2023-2025 to be 0.77, 1.84, and 231 million yuan. The corresponding PE is 165.25X, 68.97X, and 54.82X, maintaining the “buy” rating.
Risk warning
1. Residents' willingness to spend is weak, and demand for categories such as diamonds is low; 2. The number of marriages in China has declined sharply.