In 2023, the company's revenue was +2% year over year, and performance was +76% year over year. 1) The company released an annual report: 2023 revenue of 13.66 billion yuan, up 2%; performance of 1.12 billion yuan, up 76%; deducted non-performance of 1.02 billion yuan, up 105%; the company's retail retail efficiency reforms were effective, profit quality improved year-on-year, gross margin in 2023 was +2.7 pct to 44.0% year on year, and sales/management/finance expense ratio was -0.4/+0.2/-0.8 pct to 24.1%/4.6%/-1.2% year on year (the decrease in financial expenses ratio was mainly due to the increase in interest income on time deposits), net Interest rates were +3.6pct to 8.2% year over year.

2) Looking at a single quarter: 2023Q4 revenue was 4.76 billion yuan, up 9% year-on-year (year-on-year growth rate in the fourth quarter of the revenue sheet was better than the full-year performance); performance was 290 million yuan, down 21% year on year; after deducting non-performance of 250 million yuan, down 25% year on year; gross margin was +0.7 pct to 43.8% year on year; sales/management/finance expense ratios were +2.5/+0.3/-0.6 pct to 24.0%/3.9%/-1.2% year on year, net profit margin was -2.1 pct to 6.1% year on year.

Product retail efficiency measures have paid off. In 2023, children's clothing grew steadily, and adult clothing was basically adjusted. The company strengthens product functionality and fabric research and development, and fully implements the product management system to promote sales, reduce costs, and increase efficiency. By brand: 1) Children's clothing business: Continued product quality upgrades, cooperation with the world's top fabric technology companies, channel structure optimization and efficiency improvements pave the foundation for healthy brand growth. Revenue in 2023 was +5% YoY to 9.37 billion yuan, gross margin +4.9pct YoY to 46.8%, and the total number of stores at the end of the year was 5,234 (155 compared to the beginning of the year and 309 at the end of 2023Q3. We judge that this was mainly due to channel adjustments for small and medium brands). 2) Adult casual wear business: Revenue in 2023 -3% YoY to 4.17 billion yuan, gross margin -2.0pct YoY to 38.0%, total 2,703 stores at the end of the year (-48 compared to the beginning of the year and 28 at the end of Q3 2023Q). The Semma brand strengthens product functionality and fabric research and development, enhances brand consistency through global marketing renewal, and has a good healthy development momentum. Smart items such as easy down jackets and cool T-shirts have been welcomed by the consumer market.

Core brand offline stores are expected to increase net in 2024, and medium- to long-term e-commerce is expected to grow healthily. 1) Offline: In 2023, along with the year-on-year restoration of passenger flow, the company's offline flow grew steadily. At the end of 2023, the company's offline direct-management/franchise and joint venture channel revenue was 1.37/5.94 billion yuan respectively, +19%/+6% year-on-year, gross margin was +2.5/+0.6pct to 67.6%/39.8%, respectively, and the number of stores was -42/-161 at the beginning of the year to 681/7256 (-25/-312 compared to the end of 2023Q3). In the past, the company identified inefficient stores, enhanced brand consistency through global marketing renewal, and at the same time deepened product reform around consumers and promoted flexibility in supply chain operations. We judge that future improvements in brand strength and management efficiency are expected to continue to contribute to the growth of store efficiency. 2) E-commerce: Improving the quality of online business operations and optimizing the product structure. The company's online sales ratio in 2023 was -4% of 6.23 billion yuan, and the gross margin was +4.2pct to 43.0%.

Cash flow management is good, and operating conditions are continuously optimized. The company's net operating cash flow in 2023 was 1.94 billion yuan (about 1.7 times the same period), and the number of accounts receivable inventory turnover days was -2.3 days to 34.3 days year-on-year, and the cash flow was good. 2) At the end of 2023, the company's inventory value was -28.6% year-on-year to 2.75 billion yuan, and the annual inventory turnover period was -25.8 days to 155.2 days. We judge that the current inventory age structure is good and the operating conditions are healthy.

Looking ahead to 2024, both revenue and performance are expected to grow steadily and rapidly. 1) We judge that the 2024Q1 company's distribution end increased slightly year-on-year. Considering the franchisee's shipping pace, we judge that the 2024Q1 shipping side is expected to grow faster than the logistics end. 2) Considering the channel plan for the whole year, we judge that the company's terminal retail sales are expected to improve steadily in 2024. The overall estimate is that the company's revenue is expected to increase by 10% +/ performance is expected to increase by 15% to 20% in 2024.

Investment advice. The company is a leader in popular apparel and children's clothing. We expect the 2024-2026 performance to be 1,320/15.08/1,666 billion yuan, corresponding to 11.5 times PE in 2024, maintaining a “buy” rating.

Risk warning: Risk of fluctuations in the consumer environment; Semma brand business reforms fall short of expectations; channel expansion falls short of expectations; overseas business expansion falls short of expectations.