2023 forecast profit turns year-on-year loss into profit

The company issued a pre-profit announcement for the 2023 fiscal year: it is expected to achieve net profit of 190 to 245 million yuan in 2023, turning a loss into a profit compared with the same period last year; net profit after deducting non-recurring profit and loss in 2023 is 200 to 260 million yuan, an increase of 256-363% compared with the same period last year.

Key points of interest

Strategic changes continued to gain strength, and revenue basically returned to 21-year levels. On the revenue side, we expect revenue to increase by more than 15% year over year in 2023, revenue increase by more than 30% year on year in 4Q23, and basically return to the level of 21. On the one hand, it has benefited from the gradual recovery in consumer market demand. On the other hand, it has also reflected the company's effectiveness in deepening the strategic transformation of “men's pants experts” and focusing on improving product power, brand power, and channel power. Looking at each channel, the direct management channel, which is more directly affected by passenger flow and the results of the reform are rapidly recovering, we expect direct revenue to increase by 30-40% year-on-year, exceeding the same period in 2021. The franchise channel resumed at an accelerated pace in 2H23, and we expect double-digit year-on-year revenue growth in '23.

Gross margin has improved drastically, and profit and loss from changes in fair value have narrowed. On the profit side, thanks to the increase in the share of offline direct sales channels, the increase in terminal discount rates, and the return of some impairment losses in the previous period, we expect a significant year-on-year improvement in gross margin in 2023. On the cost side, thanks to the scale effect brought about by revenue growth, the cost ratio was well controlled during the period. We expect sales, management, and R&D expenses to decrease year-on-year. Furthermore, due to fluctuations in the secondary market, the profit and loss from changes in the fair value of financial assets held by the company is expected to be -1.1 to 85 million yuan, a decrease of about 45% compared to the same period last year. Overall, according to the profit range center announced by the company, the company's net interest rate increased by about 11pp/10ppt to 7%/14% year-on-year in 2023/4Q23, respectively.

It is expected that it will continue to enjoy the dividends of the reform in 24 years and achieve a relatively rapid increase in sales. In 4Q23, the company's terminal retail performance was superior to that of the industry, especially direct sales channels. The turnover growth rate increased month by month. In December alone, we expect to achieve nearly double growth. Looking ahead to 2024, we expect the company to continue to enjoy the dividends of reform and boost sales through a big single product strategy. In addition to the relatively rapid growth of direct management, the resumption of franchise shipments and the increase in the number of stores will jointly drive the company's revenue to achieve rapid growth.

Profit forecasting and valuation

Considering that the results of the investment in brand reform and upgrading are beginning to show, we raised the company's profit forecast for 2023/2024 by 8.8%/12.2% to $211/402 million, respectively, and introduced a profit forecast of 513 million yuan for 2025. The current stock price corresponds to 15.5 times/12.2 times P/E in 2024/2025, maintaining an outperforming industry rating.

At the same time, we raised our target price by 13.9% to 13.10 yuan, corresponding to 18.7 times/14.7 times P/E in 2024/2025, with 20.5% upside compared to the current stock price.

risks

The recovery in terminal demand fell short of expectations, risk of inventory impairment, and risk of investment losses.