On March 12, the company announced results for the six months ended December 31, 2023. According to the announcement, in the second half of 2023, the company achieved revenue of 7.6 billion yuan, an increase of 45%, adjusted net profit of 1.3 billion yuan, a 65% increase, and a cash dividend of RMB 650 million, accounting for 50% of the adjusted net profit. The 23Q4 company achieved revenue of 3.84 billion yuan, a record high of 54% in a single quarter. Domestic revenue of 2.35 billion yuan increased 56%, overseas revenue of 1.49 billion yuan increased 51%, and adjusted net profit of 660 million yuan increased 77%, the same record high. The adjusted net interest rate was 17.2%, an increase of 2.2 pct.

The gross margin increased significantly. In 23Q4, the company's gross margin was 43.1%, an increase of 3.1 pct, a record high. Mainly due to 1) product optimization in overseas markets and an increase in direct market revenue share; 2) the domestic brand upgrade strategy, newly launched products contributed to a higher gross profit margin while taking effective cost reduction measures; 3) TOPTOY's product structure switched to more profitable products.

In terms of expenses, there was a slight increase due to business development. The company's sales and distribution expenses rate in the second half of '23 was 17.9% and increased by 2.7 pct, mainly due to 1) increased personnel expenses, logistics costs, and IP expenses related to performance development; 2) increased depreciation related to direct-run stores; 3) increased brand upgrades and overseas promotion expenses; and general and administrative expenses fell to 4.7% from 6.0% in the same period last year, reflecting the scale effect.

Domestic single stores continue to recover, and we are actively creating a sample of supermarket stores. Domestic offline store revenue also increased 66% in 23Q4. We think it was mainly due to the increase in the number of stores and the same increase in average single store revenue by 32%. 23Q4 Mingchuang Premium has a total of 6413 stores at home and abroad (net increase of +298 in a single quarter, same below), including 3,926 Chinese stores (+124). Nearly 70% of the stores are from Tier 1 and 2 cities, including 26 direct-run stores (+6) and 3,878 third-party stores (+118). The experience of Tier 1 and 2 cities continues to permeate China's lower-tier cities. By the end of '23, China Mingchuang Premium had 522 stores in the first-tier, second-tier, third-tier or lower-tier cities respectively. The company expects to open 350-450 new domestic stores within 2024. At the same time, Mingchuang is actively building a sample of supermarket stores. This year, it has successively built city flagship stores and city image stores in the core business districts of more than 10 cities, including Chengdu, Guangzhou, Xi'an, Xiamen, and Hangzhou. The average area of newly opened stores in '23 is 14% higher than the overall store area, and the average sales volume is 33% higher than the overall store area. The flagship store in Shanghai also officially opened on December 23, with a total area of nearly 1,000 square meters. It revolves around Disney's classic IP Strawberry Bear to create an “IP paradise” style scenario-based shopping experience for consumers, achieving results of 225,000 yuan on the first day and 270,000 yuan on the next day, continuously setting new highs in Mingchuang Premium's domestic single store opening performance.

The direct market has maintained high growth, and the pace of overseas store expansion has accelerated. 23Q4 overseas revenue was 1.49 billion yuan, accounting for 38.8% of the company's total revenue. Among them, the direct sales market also increased by 90%, maintained revenue of more than 80% + for three consecutive quarters, and its share surpassed 50% for the first time. In 23Q4, there were 2,487 overseas stores (+174), and the net increase in stores in the single quarter was further broken, including 238 direct-run stores (+36) and 2,249 third-party stores (+138). At the single-store level, in 23Q4, overseas GMV increased by 19%. By channel, direct-managed GMV increased by 39% compared to same-store GMV and 13% in the agency market; by market, North America/Latin America/Asia (excluding China) had a year-on-year increase of 49%/23%/12%, respectively. As the global layout progresses steadily, the company expects to open 550-650 new stores overseas within 2024, mainly in Asia (excluding China) and Latin America, and Europe and North America will also open more rapidly.

TOPTOY continues to improve and actively optimizes its profit structure. 23Q4 revenue of 190 million yuan increased 90% to a record high. The number of stores increased to 148, with a net increase of 26 in a single quarter. For TOPTOY in the future, on the one hand, we will vigorously accelerate the pace of store expansion. In 2024, we will actively expand the network layout of offline stores and build a recognizable brand store network; on the other hand, we will continue to deeply optimize the profit structure, actively increase the sales share of our own brands, and carry out stricter cost and expense control, and carry out lean transformation from the supply chain side. We believe TOPTOY is expected to further strengthen its market position on trendy gaming tracks in 2024.

From January to January '24, GMV at Mingchuang Premium China's offline stores increased by about 13%. Compared with the same store sales recovery of 95% in the same period last year, the overseas GMV increased by about 40%. In the future, the company will continue to participate in global competition from the two dimensions of cost leadership and product differentiation, always adhering to the basic cost performance market, while actively experimenting with the supermarket strategy, locking in “big beauty,” “big toys,” and “big IP,” building a strong brand image and super category, and further enhancing the GMV of a single store. Since the company announced that the end date of the fiscal year will be changed from June 30 to December 31 of each year, we have adjusted our profit forecast. We expect the company to achieve revenue of 17.6 billion yuan and adjusted net profit of 2.85 billion yuan in 2024, maintaining a “buy” rating.

Risk warning: overseas business risks, store expansion falls short of expectations, macroeconomic risks, etc.