1HFY24 results (April-September 2023) fell short of our expectations

The company's 1HFY24 revenue was 780 million yuan, which was basically the same as the previous year; the net profit of the company lost 4.1 billion yuan and the loss for the same period last year was 350 million yuan. The performance fell short of our expectations, mainly due to increased losses due to market fluctuations in the investment business. The company declared a special interim dividend of RMB 0.71 cents per share.

The Kappa brand continues to drive operational efficiency improvements. The revenue of 1HFY24 company was 780 million yuan, which was basically the same as the previous year. Among them, Kappa brand revenue increased 8% year over year to 740 million yuan. By business, retail/wholesale revenue increased 8%/7% year on year, respectively, accounting for 58%/37% of the company's total revenue. During the period, the company continued to promote the improvement of channel efficiency and strengthen operation management. Overall offline store efficiency increased 16% year-on-year, and the retail/wholesale net customs clearance was 26/3, respectively. Looking at each channel, offline/online revenue was +15%/-27% year-on-year respectively, accounting for 84%/11% of the company's total revenue. As the children's clothing business switched to a licensing model, revenue from other businesses fell 60% year on year, accounting for 5% of the company's total revenue.

Losses in the investment segment dragged down profit performance. As of the end of September, the company held a total of 8.5 billion yuan in cash and investments, of which 55% was invested in financial assets, and cash and equivalent accounted for 28% (about 26% at the end of March). The 1HFY24 investment segment lost 500 million yuan (vs. loss of 330 million yuan in the same period last year), mainly due to changes in the fair value of financial assets and a loss of 540 million yuan. The management plans to further strengthen the optimization of existing investment allocations, carefully promote investment in new projects, and promote the timely and reasonable exit of existing projects.

The improvement in retail discounts has led to a sharp increase in gross margin. The inventory impairment of the 1HFY24 company returned 0.2 billion yuan, which was basically the same as the previous year. The gross margin before deduction of inventory impairment provisions increased 6.9ppt to 66% year on year, mainly due to the increase in the share of new terminal products and improved discounts. The sales and management expenses ratio fell 2.7ppt to 67% year on year, mainly due to the shift in store shelf expenses to depreciation and amortization and the pace of marketing promotion and investment. Operating profit margin fell 13ppt to -61% year on year (after excluding investment segments, operating profit margin increased by 13ppt to 10%). As of the end of September, net inventory value fell 20% year over year to 360 million yuan.

Development trends

Since October, Kappa brand terminal sales growth has continued the 1HFY24 trend. Management will continue to promote channel optimization and improvement, focus offline on improving the store efficiency of core key stores, and focus on the differentiated layout of the platform online.

Profit forecasting and valuation

Considering that the company's investment losses dragged down performance, the FY24/25 EPS forecast was lowered from 0.05/0.06 yuan to 0.03/0.05 yuan. The current stock price corresponds to 9/5 times the FY24/25 price-earnings ratio, maintaining an outperforming industry rating. Maintaining 6.5 times the price-earnings ratio of the company's apparel business in FY24, and taking into account the value of the investment business after valuation discounts, we have basically maintained a target price of HK$0.34 based on segmentation and total valuation, with room for growth of 29%.

risks

Competition in the industry has intensified, the terminal retail environment has fallen short of expectations, reforms have fallen short of expectations, and investment returns have fluctuated.