Incident Overview

The company's revenue, net profit to mother, and net operating cash flow in 2023 were 35.44/5.30/1100 billion yuan, up 14.8%/18.4%/68.3% year-on-year, corresponding to 7.0%/21.4% and 5.2%/36.1% in the first and second half of the year, respectively. The higher operating cash flow than net profit attributable to mother is mainly due to depreciation, increased other accounts payable, and a decrease in accounts receivable. The company paid an interim dividend of HK$0.13 per share and a special interim dividend of HK$0.05 for the whole year; a final dividend of HK$0.13 per share and a special final dividend of HK$0.05, with a dividend rate of 8.5% for the whole year.

Analytical judgment:

Net store opening did not meet the expectations of 100 stores in '23. Main brands removed inventory, light commerce, and Q4 sales increased significantly (1). On a quarterly basis, retail sales increased by low double digits year on year in 23Q1, high year-on-year unit growth in 23Q2, low double-digit year-on-year growth in 23Q3, and 35% year-on-year increase in 23Q4. (2) By brand, the revenue of the main brand/light business series increased by 10.7%/35.2%. The rapid growth of light business mainly benefited from the opening of more new stores, the increase in the share of high-end series sales, and the increase in store efficiency and average unit price. (3) In recent years, the company has carried out a series of actions such as wholesale to consignment sales, consignment sales to direct management, etc. At the end of 23, the company had a total of 2,695 stores (the main brand/light business series was 2393/302, respectively, and 936/1462/297, respectively), an increase of 3% over the previous year (51 during the year, with a net increase of 8/43 for main brands/light businesses, and a net opening of -1/50 in the second half of the year; the net opening of 228/224/45 stores in the second half of the year); the total store area was about 429,500 square meters, up 6.4% year on year. The efficiency of the main brand/light commercial store was 106.85/2.0941 million respectively, up 29.75%/36.34% year on year. We analyzed that part of the increase in store efficiency came from the contribution of wholesale to consignment sales and direct sales; the total efficiency was 0.74 million yuan/square meter/year, an increase of 27% year on year. 4) By region, North China and Northwest China had higher growth: Northeast China/North China/East China/Southwest/Southwest/Northwest China increased revenue by 11.0%/29.4%/14.7%/12.4%/8.1%/22.5%, respectively. The increase in the number of stores in Northwest China and North China was mainly due to an increase in the number of stores, revenue in East China increased 14.7% due to the increase in stores and e-commerce sales included in its business scope. The lower growth rate in Northeast China and Southwest China was due to a decrease in stores during the year. (5) By category, sales of tops/pants/accessories increased 14.3%/12.3%/-14.6% year on year, accounting for 65%/21%/7%. Among them, the year-on-year increase in the top category mainly benefited from the increase in sales in the down jacket category.

The increase in the share of light business led to an increase in gross margin. The increase in net margin was lower than gross margin mainly due to an increase in sales expenses. The gross margin in '23 was 48.2%, up 2.2 PCT year-on-year, mainly due to the significant increase in sales during the year in light commerce, which had higher gross profit, and inventory reserve rebates increased by 26.6 million yuan year-on-year in '23, and there was no need to provide rebates to distributors during the year. Net profit margin for '23 was 15.0%, up 0.5PCT year over year. The main reasons why the increase in net interest rate was lower than gross margin: (1) Sales and distribution fee rate/administrative expense ratio/other operating expenses ratio were 27.0%/5.0% /0.36, respectively, up 1.3/-0.8/0.3PCT. Among them, the increase in sales and distribution expenses was mainly due to the Group's launch of a new brand logo during the year and strengthening the image of promoting simple menswear. In addition, the store renovation plan originally scheduled for 2022 was delayed until 2023 due to the impact of the pandemic. (2) The share of interest income/expenses/non-current account profit and loss increased by 0.61/0.32/-0.54 PCT year on year. The decline in non-current account profit and loss was mainly due to a decrease in government subsidies. (3) Income tax/revenue increased by 0.4 PCT year-on-year, mainly due to a decrease in annual provisions for in-stock and right-of-use assets, and a decrease in deferred tax deductions.

Inventory continues to improve. In '23, the company's inventory was 826 million yuan, down 6.72% year on year. The number of inventory turnover days was 170 days, down 25 days year on year. Mainly due to more effective inventory management, the inventory sell-out rate was high. Accounts receivable were 733 million yuan, a year-on-year decrease of 13.01%. The number of accounts receivable turnover days was 42 days, a decrease of 12 days year-on-year, mainly due to an increase in the collection of long-outstanding response receivables and an increase in the proportion of light commercial sales, mainly retail, during the year. The company's accounts payable were 1.09 billion yuan, up 13.61% year on year. The number of accounts payable turnover days was 130 days, an increase of 19 days over the previous year, mainly due to the increase in the use of trade notes to be repaid at a later stage.

Investment advice

According to our analysis, (1) In the short term, we expect a net increase of 100-200 offline stores in 24 years, and will continue to renovate 400 seventh-generation renovation projects. The location of the new stores will be selected as the first choice of shopping malls in provincial capitals and prefecture-level cities, while at the same time increasing the number of Ole stores. On the online side, the company plans to increase the new retail business by more than 20% year-on-year in 24, and the overall sales increase by 15%. (2) In the medium to long term, the company's light business series and e-commerce channels are still growing. Considering the increase in the share of consignment sales and direct management, light commerce and e-commerce continued to grow rapidly, increasing 24/25 revenue of 39.8/44.7 billion yuan to 40.8/4.62 billion yuan, increasing 24-year revenue of 5.20 billion yuan, increasing 24/25 net profit of 58,000-650 million yuan to 61/70 million yuan, corresponding to an increase of 24/25 EPS of 0.48/0.54 yuan to 0.51/0.59 yuan, with an additional EPS of 0.67 yuan in 2024 The closing price of HK$4.25 on March 18 was 8/7/6 times PE for 24/25/26 (HK$1 = RMB 0.92), maintaining a “buy” rating.

Risk warning

Uncertainty about the impact of the pandemic; brand aging being diverted from fashion and leisure; franchisee closure due to declining profits; systemic risk.