Incident Overview
In 2023, the company's revenue/ net profit attributable to mothers/ net operating cash flow were $84.23/9.6/ 407 million yuan respectively, up 21.0%/28.7%/7.22% year-on-year, in line with the performance forecast. The growth rate of operating cash flow was low, mainly due to a 32% year-on-year increase in trade receivables; the higher growth rate of net profit due to higher gross margin and impairment losses of accounts receivable of 166 million yuan accumulated in '22 ($45 million refunded in '23). Excluding this influence, net profit to mother increased 0.3% year-on-year in '23. It is proposed to pay dividends of HK$0.204 (RMB 0.187) per share in '23. The dividend ratio is 40.2%, which is higher than the mid-term dividend rate, which corresponds to a dividend rate of 4.5%, which is in line with consistent market expectations.
Analytical judgment:
Revenue growth is mainly due to contributions from children's clothing and e-commerce. Main brands are opening stores at an accelerated pace, and children's clothing is slowing slightly. (1) By channel, 1) Offline retail revenue in '23 was 6.09 billion yuan, up 15.4% year on year, of which the number of stores increased 6.6%: in '23, there were a total of 8,279 domestic stores (5734 main brands and 2,545 children's stores), up 6.6% year on year (number of main brand/children's stores increased 4.6%/11.2% year on year). 2) E-commerce business revenue in '23 was 2,326 billion yuan, accounting for a year-on-year increase of 1PCT to 27.6%, and a year-on-year increase of 38%. (2) By brand, 1) The revenue of the 361-degree main brand (not including international business) was 6.334 billion yuan, up 49.5% year on year; when split, the number of stores increased 4.6% year on year (254 net sales, higher than 210 in '22, net opening 162/92 in the first and second half of the year). According to our estimates, online channel revenue increased 30% year over year, and offline store efficiency increased 7% year over year to 1.53 million yuan. 2) Children's brands increased 35.7% to 1,958 billion yuan, accounting for a year-on-year increase of 2.5PCT to 23.2%. Looking at the breakdown, the number of stores increased 11.2% year over year (257 net stores, down from 392 in '22, net opening 160/97 in the first half of the year). According to our estimates, online channel revenue increased 71% year over year, and offline store efficiency increased 12% year over year to 1.08 million yuan. 3) International business line revenue was 185 million yuan, up 49.5% year on year, of which the number of stores increased 5.7% year on year to 1,260. (3) By category, the revenue of footwear, clothing, accessories, and children in '23 was 35.10/26.87/1.37/19.58 billion yuan, up 22%/10%/38%/36% year on year. The average sales price increased 3%/0.5%/-12.4%/3.7%, respectively, and sales increased 19%/9%/63%/31%, respectively.
The increase in net interest rate was higher than the increase in gross margin due to loss impairment reversals. The company's net interest rate in '23 was 11.4%, up 0.7 PCT year on year; gross margin in '23 was 41.1%, up 0.6 PCT year on year. The increase in net interest rate was higher than the increase in gross margin due to a 2.9 PCT increase in revenue from depreciation losses.
1) The gross margin of footwear/361 kids/clothes/accessories/other categories (soles) increased by 1.2/0.9/-1.1/-1.3/12.1PCT year-on-year. Among them, the increase in shoe gross margin mainly benefited from higher average product prices, effective OEM cost control, and an increase in the share of e-commerce revenue with higher gross margins. 2) The ratio of sales and distribution costs/administrative expenses/financial expenses in '23 was 22.1%/7.5%/0.2%, up 1.5/-0.3/0.1 PCT year on year; other revenue/revenue decreased by 1.4 PCT year on year, mainly due to a 38% reduction in commissions collected by distributors to help sell inventory through e-commerce in '23.
Inventory and capital operation capacity are at a healthy level. The 23-year inventory was 1.35 billion yuan, up 14.20% year on year; the average number of working capital turnover days was 93 days, up 2 days year on year; the average working capital turnover days was 132 days, up 15 days year on year, mainly due to the increase in the inventory turnover cycle, the extension of the turnover cycle of trade receivables and notes receivable, and the reduction in the number of turnover days of accounts payable and notes payable; the average number of accounts payable turnover days was 149 days, an increase of 2 days over the previous year; the average number of accounts payable turnover days fell 11 to 110 days year on year, mainly due to shortening the company through settlement cycle, strengthening and Supplier partnerships.
Investment advice
According to our analysis, (1) In the short term, the consumption downgrade trend has benefited 361 degrees. Most of the brand's products focus on popular routes, and stores are concentrated in third-tier urban agglomerations; in addition, in 2023, the company officially announced that the 2023-2023 NBA champion star Jokic is the global brand ambassador. In December, Jokic appeared for the first time wearing combat boots “BIG3 Future”, which received exposure from domestic and foreign media, further increasing the attention of 361 professional basketball products, which is expected to drive the company's basketball category sales. (2) Looking ahead to 24 years: According to the pace of opening stores in '23, we expect that the main brand and children's clothing stores will each increase by 100-200 stores this year, and the current area of the main brand/children's clothing store is estimated to be around 140/100 square meters, and there is room for expansion, so the same store is expected to grow by more than 10%; (3) Overseas currently accounts for 2%, and it is estimated that it will continue to maintain high double-digit growth in 24 years. Maintaining the profit forecast, the 24-25 revenue forecast is 100.78/11.616 billion yuan, adding an additional 26-year revenue forecast of 13.353 billion yuan; considering that the increase in e-commerce share may affect net interest rates, the 24-25 net profit margin was lowered to 12.48/14.72 billion yuan to 11.81/1.95 billion yuan, and the 26-year net profit forecast was increased by 1,630 billion yuan; corresponding to a 24-25 EPS reduction of 0.60/0.71 to 0.57/0.67 yuan, an additional 26-year EPS of 0.79 yuan. The closing price of HK$4.58 on March 13, 2024 was 7/6/5X (corresponding 1 HKD = RMB 0.92) for 24-26 PE, respectively, maintaining a “buy” rating.
Risk warning
Uncertainty about the development of the epidemic; store opening falls short of expectations; channel inventory processing falls short of expectations; systemic risks.