Revenue and earnings resumed growth for the full year of 2023. Baosheng International is a leading sports brand retailer and dealer in China. Revenue of 20.06 billion yuan was achieved in 2023, +7.7% year over year; net profit increased 450.6% year over year to 490 million yuan. Gross margin fell 2.2 percentage points to 33.7% year on year. The decline in gross margin was mainly affected by the removal of old inventory strategies and the poor channel mix due to an increase in the share of franchise channels with low gross margins. Driven by the company's strategies of strictly controlling discounts, actively promoting rent control, and improving store efficiency, operating profit margin increased 1.5 percentage points to 3.7% year over year; net interest rate increased 2.0 percentage points to 2.4% year on year, reaching the highest level since the 2020 pandemic. Inventory amounts decreased, inventory structure improved, and operational efficiency improved. A final dividend of HK$0.012 per share was paid, with a dividend payout ratio of 30% for the whole year.
Fourth-quarter profit improved significantly, and gross margin increased year-on-month. Revenue for the fourth quarter increased 8.9% year on year to 4.62 billion yuan, and net profit to mother reversed the year-on-year loss to 180 million yuan. Through strict control of discount rates and the weakening of negative factors of changes in old inventory and channel structure, gross margin increased 0.3 percentage points to 35.7% year on year. At the same time, benefiting from factors such as rent control, improved human efficiency, and improved store efficiency, operating profit margin increased 3.1 percentage points to 4.8% year on year, and net interest rate increased 4.1 percentage points to 3.9% year on year.
Store efficiency has improved, and pan-micro stores are growing strongly. 1) Store optimization and adjustment. Although the number of stores declined, store efficiency improved. The same store grew significantly in the fourth quarter. In 2023, 570 direct-run stores were closed, and the share of high-quality stores over 300 square meters continued to increase by 2 percentage points to 21%. Overall efficiency improved, with customer unit prices increasing by double digits year on year; store efficiency and floor efficiency increased by double digits year on year. Same-store sales increased significantly in the fourth quarter, up 12.1% year on year.
2) Pan-micro stores are growing strongly, and their share of revenue contribution continues to rise. Panwei store revenue grew strongly by 40% year-on-year, accounting for 13.4% of total revenue, accounting for 20.9% of offline direct sales, and 23% of offline direct sales in the fourth quarter of a single quarter.
Outlook: Operating profit margins are expected to continue to rise over the next three years. 1) Recent performance: The cumulative net operating income for January-January of this year fell 6.7% year-on-year. 2) Profit margin outlook: The gross profit margin and operating profit margin are expected to increase by 1 percentage point year-on-year in 2024, that is, to reach 34.7%/4.7%, respectively; the operating profit margin is expected to increase by 1 percentage point every year from 2024 to 2026, moving towards the target of 7%.
Risk warning: Consumption recovery falls short of expectations; supply chain logistics are blocked; channel optimization reforms fall short of expectations.
Investment advice: Optimistic about short-term profit improvements and the sustainability of medium- to long-term growth momentum. Revenue growth resumed in 2023; at the same time, benefiting from refined operations, strict discount rate control, and the release of operating leverage effects combined with a low base, net profit increased dramatically; inventory structure, inventory turnover, and working capital turnover efficiency improved, and cash levels rose. Profit improvements and same-store sales growth in the fourth quarter of a single quarter were even more obvious. Looking ahead to the next three years, profitability will continue to improve. Based on the significant improvement in the company's profit margin for FY2023, especially the fourth quarter, and the expected continuous increase in operating profit margins for the next three years, we have raised our profit forecast for 2024-2025. We expect net profit for 2024-2026 to be $5.8/7.3/890 million (pre-2024-2025 value was $54/660 million), +19%/25%/22% year-on-year, maintaining a reasonable valuation range of HK$0.77 to 0.88, corresponding to 6-7xPE in 2024, maintaining a “buy” rating.