Key points of investment

The company issued a performance forecast, and the performance exceeding expectations continued to verify the brand's upward logic.

The company issued a performance forecast, and the annual profit performance exceeded market expectations.

The company released a performance forecast. According to preliminary estimates by the company's finance department, it is expected to achieve net profit of about 285-308 million yuan in 2023, YOY +299% to 330%, exceeding Wind's consistent forecast (180 days) of 279 million yuan. Net profit attributable to owners of the parent company after deducting non-recurring profit and loss was approximately $257-277 million, YOY +449% to 493%.

If calculated according to the upper and lower limits, the company's net profit for Q4 fell between 0.94 to 117 million yuan. Compared with turning a loss into a profit in Q4 in '22, there was also an increase of 13%-40% compared to the same period in 21Q4. Net profit after deducting non-return to mother in a single Q4 fell between 0.92 to 112 million yuan. Compared with 22Q4, it turned a loss into a profit, and a growth rate of +19%-45% compared to 21Q4.

The company's outstanding profit performance mainly comes from obvious positive operating leverage brought about by revenue growth (online business continues to grow rapidly, offline business continues to grow steadily) and continuous improvement in the company's operating quality and operating efficiency (sales rates are effectively controlled, and financial expenses are drastically reduced year-on-year).

Diversification of categories and refined channel operation are expected to continue to drive revenue growth, and net interest rates are expected to continue to rise.

With rich categories and refined channel management, we believe that the company's revenue is expected to maintain a 10%-15% growth level.

1) Category diversification: The plan is to gradually expand the customer base and categories, expand products for commuting, social, and vacation scenarios; and increase sales conversion rates by promoting integrated product development.

2) Refined channel operation: With refined operation management for direct-run stores, it is expected that various store groups will be launched to improve store efficiency; different product combination models for different store groups; channels such as Douyin have also opened various store types according to the needs of customer segments.

At the same time, due to the following drivers, we believe that the company's net interest rate is expected to increase by about 1pp to 7% in 24 years, and is expected to be close to the industry average of about 10% in the medium to long term.

1) Direct management efficiency improvement: refined channel+product matching brings about an increase in single store revenue, thereby increasing net interest rate under positive cost leverage.

2) Channel structure optimization: The company has paid more attention to franchise channels in recent years. As of 9/30TW, it had 1123 stores, 23Q1-Q3TW had a net opening of 82 franchisees, and a net clearance of 181 direct-run stores. The share of franchise revenue continued to rise, driving the company's net interest rate to increase.

3) Financial expenses are reduced year by year: At the end of '23, there are still 890 million financial liabilities, and 150 million dollars will be repaid in June and December each year, reducing financial expenses by 20 million from year to year.

Profit Forecast and Valuation:

With years of accumulation, the company's brands have established a good brand mentality, accumulated a strong offline sales channel network, and formed a mature online platform style of play. With the continuous improvement of cash flow conditions and the expansion of franchise channels, the company's burden is expected to continue to be reduced and profits are expected to be released. We expect the company's revenue in 23/24/25 to be 44.1/49.4/5.53 billion yuan, +13%/+12%/+12%, net profit due to mother of 2.9/36/450 million yuan, +301%/+26% year-on-year, corresponding to PE12/10/8X, with great potential to maintain a “buy” rating.

Risk warning: macroeconomic fluctuation risk: industry competition risk; financial risk; R&D design risk;