The company released a performance forecast, with an estimated net profit of 100 to 130 million yuan in 2023. 1) The company released a performance forecast. Net profit due to mother is expected to be between 100 and 130 million yuan in 2023, up 389% to 536% year on year (without taking into account the impact of impairment of goodwill, the net profit for 2023 is estimated to be about 20 to 230 million yuan, up 878% to 1025% year on year, in line with market expectations); net profit without deducting non-return to mother is 0.76 to 106 million yuan, up 1,428% to 2032% year on year. 2) Looking at the fourth quarter of a single quarter, the net profit of 2023Q4 was a loss of 40 million yuan to a loss of 0.1 billion yuan (if the impact of impairment of goodwill is not taken into account, the net profit of 2023Q4 was 60 million yuan to 90 million yuan).

1. Overseas business falls short of expectations, leading to impairment of goodwill, and short-term performance is hampered. The consumer environment and expectations in Europe and the US are weak. Considering that the overseas business performance of the IRO brand fell short of expectations in 2023, the company estimates and expects to calculate 90 to 100 million yuan in commercial impairment within 2023. We judge that the company's accounting treatment is careful, and that operating risks were reflected on the financial side earlier.

2. Domestic operating profit recovery is good, leading the industry. The company has implemented a channel strategy based on direct management and continuous expansion. Along with the improvement of the domestic consumption environment, the cost reduction and fee control effects brought about by positive operating leverage were reflected: in 2023, the company's overall domestic profit returned to the level of 2021, and profit margins were clearly recovered compared to 2022. We judge that the domestic business profit performance is leading the industry.

Revenue increased 20% to 25% in 2023, channel expansion progressed smoothly, and revenue performance led the industry. The channel expansion strategy continues to advance smoothly, which is expected to help the company continue to lead the industry in revenue performance. According to the company announcement, revenue for 2023 is expected to increase 20% to 25% compared to 2022/22% to 27% year-on-year (2023Q4 revenue is expected to increase 24% to 43% compared to 2022/17% to 34% year-on-year increase). We judge that sales of self-portrait, Laurel, and IRO (domestic) brands are growing rapidly year-on-year. Looking at volume and price breakdown: 1) Number of stores: The total number of stores is expected to be 651 at the end of 2023 (a net increase of 38 compared to the beginning of the year), of which 503 are directly managed (a net increase of 43 compared to the beginning of the year), an increase of up to the number of units. Based on each stage of brand development, we judge that the rapid pace of self-portrait, Laurel, and IRO (domestic) brand expansion will continue in 2024, and ELLASSAY stores are expected to increase steadily. 2) Store efficiency: Domestic and offline passenger flow resumed in 2023, combined with companies taking the initiative to improve operating efficiency. We judge that store efficiency grew rapidly in 2023 year on year, and is expected to rise steadily in the medium to long term.

Cash flow is well managed, and operations are expected to improve in the future. 1) The company's cash flow management is good. The net operating cash flow from Q1 to Q3 is 360 million yuan (about 2.6 times the same period), the balance ratio at the end of 2023Q3 is 33%, and the monetary capital on account is 550 million yuan. 2) Inventory turnover is expected to improve further in the future. Inventory at the end of 2023Q3 was +2.2% year-on-year to 780 million yuan, and the number of inventory turnover days in 2023Q1-Q3 was 7.4 days to 306.2 days year over year.

The 2024 results are expected to grow rapidly on a low base. In 2023, the company carefully calculated impairment of goodwill, and short-term performance was weak. Looking ahead to 2024, we believe: 1) On the revenue side, the company seizes market share opportunities and continues to advance channel expansion strategies, which is expected to drive steady revenue growth of 10% to 20%. 2) On the profit side, good domestic profit margin performance is expected to continue, and overseas performance is expected to drag down or ease. It is expected to drive continued recovery in profit quality and rapid growth in performance on a low base in 2024.

Profit forecast and investment advice: The company is a leading domestic luxury fashion leader, and multi-brand strategy optimization and channel adjustments continue.

Taking into account the company's recent operating performance and calculated goodwill impairment of 90 to 100 million yuan in 2023, we adjusted the profit forecast. The company's net profit from 2023 to 2025 is estimated to be 1.17/3.16/368 million yuan, respectively. The current price corresponds to 2024 PE 9.5 times, maintaining the “increase” rating.

Risk warning: Downstream consumer demand fluctuates; consumption is weak due to macroeconomic downturn; franchise business falls short of expectations, new brand expansion and opening are not progressing smoothly.