Revenue/performance in 2023 increased 21%/29% year over year, and the performance was excellent and in line with expectations. The company released its 2023 annual report, with revenue +21.0% to 8.42 billion yuan, strong demand from franchisees to pick up and replenish goods, gross margin +0.6 pcts to 41.1% year over year, sales expenses ratio +1.5pcts to 22.1% year over year, management expenses ratio -0.3 pcts to 7.5% year over year, and expected credit return of about 45 million yuan for the company's trade receivables during the period (estimated provision of about 170 million yuan for the same period), combined with net profit of the parent +28.7% to 960 million yuan, net interest rate to mother + 0.7pcts to 11.4%, overall performance was excellent, in line with expectations. At the same time, the company paid a final dividend of approximately HK13.9 HK cents/share, and a total dividend of 20.4 HK cents/share for the whole year, with a dividend ratio of 40.2%.

361 degree adult business: Offline channel expansion continues to expand + area, product-side specialty category functionality continues to improve, and multiple factors work together to drive growth. Adult revenue for the full year of 2023 increased 17% year on year to 6.33 billion yuan, of which shoes/clothes/accessories revenue increased 23%/9.8%/43% year on year respectively. We judge that the rapid growth in the adult clothing business benefited from: 1) Channel side: the number of stores was steadily expanding. According to the company's disclosure, the number of offline adult clothing stores was 5,734, a net opening of 254 over the same period last year. In the process of optimizing the store structure, the average area of offline stores also expanded. At the same time, the average area of offline stores increased 7% to 138 square meters year on year. At the same time, e-commerce Rapid growth was also achieved during the period. 2) Product side: On the other hand, in 2023, 361 Degrees's running and basketball categories are also in the process of continuous upgrading. Running shoes launched products such as Fei Biao Futrue1.5 and Feifun 3 during the year, increasing brand influence and consumer recognition.

361 degree children's clothing business: Adhering to the position of youth sports experts, rapid growth continues. According to the company's disclosure, the revenue of the children's clothing business increased 36% year-on-year to 1.96 billion yuan in 2023, continuing the rapid growth trend. 361 Degrees Children's Clothing is positioned as a youth sports expert. The core series (Flash, Wind Turtle, Magic Armor) will be updated and iterated in 2023, and franchisees are highly willing to buy goods. On the channel side, by the end of the period, the number of children's clothing stores was 2,545, with a net opening of 257 over the previous year. The average area of a single store increased by 12%, and channel efficiency continued to improve. In the long run, we judge that the children's clothing business is in the process of “single store+store opening” increase year on year.

361 degree e-commerce business: The growth rate was excellent in 2023, and the long-term market share of e-commerce channels is still increasing. In 2023, e-commerce business revenue increased 38% year-on-year to 2.33 billion yuan. While achieving product sales, the e-commerce business plays a role in brand image building. In the long run, 361 degrees has excellent e-commerce platform operation capabilities and targeted product supply, the e-commerce channel growth rate is still expected to outperform the industry, and the market share continues to rise.

The operating capacity is stable, and the company and channel inventory structure are good. From a corporate perspective, as of the end of 2023, the company's inventory amount was 1.4 billion yuan, and the number of futures turnover days was 93 days (2 days longer than the previous year). We expect the offline channel inventory ratio to be between 4.5 and 5, all of which remain healthy. In terms of cash flow, the company's net operating cash flow in 2023 was 408 million yuan, an increase of 7% over the previous year. In the future, the company will continue to improve its cash flow management capabilities by optimizing operational efficiency.

We expect a 19%/20% increase in revenue/performance in 2024. We expect that in 2024, the company will continue to improve store efficiency through the optimization of product structure and channel structure. At the same time, children's clothing and e-commerce channels will maintain a rapid growth trend. Combined with order meeting performance, we currently expect the company's performance to increase by 20% in 2024.

Profit forecast and investment advice: We expect the company's net profit to be 11.6/13.6/1.58 billion yuan in 2024-2026, and the current price is 7 times PE in 24, maintaining a “buy” rating.

Risk warning: Store expansion falls short of expectations, consumer environment recovery falls short of expectations, RMB exchange rate fluctuates.