The net profit for 23Q4 is expected to exceed the same period in '21. The company expects to achieve net profit of 1-130 million yuan in 23, an increase of 388.95%-535.64% over the previous year, and net profit deducted from non-return to mother of 0.76 to 106 million yuan in 23, an increase of 1428-2032% over the previous year. Without considering the impact of goodwill impairment charges, net profit to mother is expected to be achieved in '23 billion yuan, an increase of 877.91% to 1024.60% year on year; 23Q4 achieves net profit to mother of 0.64 to 94 million yuan, which exceeds the same period in '21 (60 million yuan).

Marginal restoration of the retail environment, and active expansion strategies reflect operating leverage. Determine the main reason for the advance increase in net profit attributable to mother:

① Revenue pre-increased 20-25% in '23 (22-27% compared to '21:22-27%). All of its brands achieved growth, and Self-Portrait, Laurèl, and IRO Paris performed well in the domestic market. ② Channel expansion, offline: By the end of 23, the number of stores is expected to reach 651, including 503 direct-run stores, a net increase of about 43 from the beginning of the year; online: multi-brand and multi-platform development strategies, online revenue is growing well. ③ Focusing on long-term and active expansion to drive continuous good revenue growth, increase sales of newly opened stores in 23 years, and optimize cost rates, the company expects domestic business profits to return to the level of 21.

External demand is weak, and preparations for impairment of goodwill are carefully calculated. In '23, the company plans to prepare a goodwill deduction of about $90-1 billion for the goodwill impairment formed by the previous transfer of shares in Qianhaillin and its subsidiary Tangli International. Mainly due to weak external demand in Europe and the US, IRO Paris' overseas business performance was greatly impacted and did not meet full-year expectations. Furthermore, macroeconomic pressure on Europe and the US is high, and profitability may decline in the future. We believe that the company's calculation based on the principle of prudence fully anticipates the business risks that may be brought about by the macro environment, dragged down apparent performance in the short term, and is expected to go light in the long run.

Profit forecasting and valuation. Considering that overseas market recovery fell short of expectations, we lowered our profit forecast. The company's net profit for 2023/2024 is estimated to be 125 million yuan/309 million yuan (previously 303 million yuan/391 million yuan).

At the same time, since the company is a leader in luxury fashion women's clothing in China, the main brand continues to expand its stores and improve store efficiency, and the advantages of the multi-brand matrix are obvious. The self-portrait brand, the Laurèl brand, and the IRO Paris domestic market are growing rapidly, so we have given the company an appropriate valuation premium. We lowered our target price by 15%, based on the 2024 PE valuation of 15X (originally 18x in 2023) to 12.55 yuan, maintaining the “superior to market” rating.

Risk warning. The recovery of the retail environment fell short of expectations, the speed of opening stores fell short of expectations, and changes in the international environment affected overseas business.