Matters:

The company released its FY24 interim report with revenue of $2,795 billion and YoY +34.4%. Among them, e-commerce revenue from proprietary products and live streaming was RMB 2,411 million, YoY +36.6%; university education revenue was RMB 366 million, YoY +23.9%; and institutional business was RMB 18 million, YoY -6.2%. Net profit attributable to mother was 249 million, YoY -57.4%; adjusted net profit of 51 million, YoY -15.4%. The revenue side slightly exceeded expectations, and the profit side fell short of expectations. The main reason was the decline in gross margin of the live e-commerce business and the increase in equity incentive costs during the reporting period.

Commentary:

The multi-channel expansion of e-commerce business led to an increase in revenue, an increase in the share of proprietary products, and a decline in gross margin. Revenue side:

1) E-commerce revenue of proprietary products and live streaming was 2.41 billion (YoY +36.6%), the majority of the business (accounting for 86%), of which the revenue from proprietary products was 1.9 billion (YoY over 50%), which increased to 78.8% (about 60% in the same period last year). GMV from Douying/Taobao/proprietary apps was 5.7 billion (YoY +18.8%), a steady growth rate; 2) University education revenue was 370 million (YoY +23.9%); 3) Institutional customer revenue was 18 million (YoY -6.2%). Profit side: Gross margin fell to 39.1% (47.2% in the same period last year), mainly due to increased inventory costs and transportation costs due to channel expansion and expansion of proprietary products during the performance period. The share of self-operated products increased, and the gross profit of self-operated e-commerce and live streaming decreased to 32.9% (42.5% in the same period last year). The increase in gross margin of university education to 77.6% (73.7% in the same period last year) is due to an increase in brand effect+a decrease in low-cost introductory courses. The gross margin for institutional clients increased to 88.8% (79.2% in the same period last year). The sales expense ratio of 20.0% (+9.0pct year over year) is an increase in employee costs due to business expansion. The R&D expenses rate is 2.7% (+0.4pct year over year), and the administrative expenses ratio is 5.1% (+2.1pct year over year). Taken together, the net interest rate is 8.9%, and the adjusted net interest rate is 18.2%.

Multiple channels, new accounts, and overseas preparations help expand e-commerce business. The company fully invested in the live e-commerce business in 23 years, quickly launching channels such as apps, mini-programs, Jingdong Mall, and Tmall stores; established the “Oriental Selection to Watch the World” Douyin account to explore live streaming of cultural tourism and delivery. The “Walk with Hui” account was launched at the end of '23. According to Grizzly Dolphin's backstage, its average daily GMV has surpassed Dongfang's Selected Beautiful Life account, which is expected to contribute to increased performance in FY24H2. The company is also exploring overseas routes. According to the recruitment website, it has opened recruitment for overseas Tiktok teams. It is recommended to pay attention to future changes. In line with the company's November 23 announcement, it will sell the education business to the parent company New Oriental for 1.5 billion yuan, and plans to use the sales amount to invest in e-commerce operations. We believe that the main line of development of its e-commerce business deserves continued attention.

Investment advice: The company's e-commerce business revenue is steady, and the strategy is further improved in the expansion of new channels and new accounts. However, considering the decline in gross margin brought about by short-term business expansion and the increase in equity compensation incentives due to organizational structure changes, we lowered the adjusted net profit forecast for FY2024-26 to 10.96/11.78/1.70 billion yuan, up 1%/7%/16% year on year (previous value was 11.23/13.51/16.24 billion yuan, up 3%/20% year on year), corresponding to 18/17/15 times PE. Based on the SOTP valuation, the company's target market value for 24 years is 30.8 billion yuan, corresponding to a target price of 33.34 HKD, maintaining a “recommended” rating.

Risk warning: Live e-commerce regulations are becoming stricter, anchors' inappropriate remarks affect brand image, competition between channels disrupts traffic structures, and self-operated products and supply chain controls fall short of expectations.