Revenue grew steadily and profits improved in 2023. Semma owns casual clothing for adults represented by the Semma brand and children's clothing represented by the Balabara brand. Revenue in 2023 was +2.47% to 13.66 billion yuan; net profit to mother was +76.06% YoY to 1.12 billion yuan. On the one hand, the sharp increase in net profit benefited from optimization of operating efficiency and improved discount rates under the global retail strategy, and gross margin increased 2.7 percentage points to 44.0% year on year; on the other hand, cost ratio optimization, and the overall expense ratio decreased 1.1 percentage points year on year. Driven by increased gross margin and lower expense ratios, operating profit margin was +4.5 percentage points year over year; net profit margin was +3.6 percentage points year over year to 8.32%.
Revenue growth accelerated in the fourth quarter, and net profit was under pressure due to increased expense ratios. Revenue for the fourth quarter was +8.5% YoY to $4.76 billion; Net Profit to Mother -20.8% YoY to $290 million. Gross margin increased 0.7 percentage points to 43.8% year on year; overall expenses increased 2.6 percentage points, with sales expenses increasing significantly, which is expected to be mainly due to intensive inventory clean-up and promotional activities in the fourth quarter. Due to the increase in the expense ratio, the net interest rate fell 2.1 percentage points to 6.1% year over year. Inventories declined significantly year over year.
By the end of 2023, the company's inventory amount was 2,747 billion yuan, down 28.6% year on year; inventory volume was 70.4 million pieces, down 28.0% year on year; inventory turnover decreased by 26 days to 155 days year on year. The company's inventory removal effect was remarkable in 2023. In particular, the fourth quarter was launched along with the Double Eleven and Double 12 promotions, which further reduced the inventory burden and laid a good inventory foundation for 2024.
By category, children's clothing performed better, and by channel, direct sales channels performed brilliantly. 1) Children's apparel revenue and gross margin both performed well. The annual revenue of children's apparel was +4.9% to 9.37 billion yuan, and gross margin increased 4.9 percentage points; casual wear revenue was -2.6% to 4.17 billion yuan, and gross margin decreased 2.6 percentage points year-on-year. 2) The retail growth rate is better than wholesale, and offline is better than online. Direct marketing/franchise/online channel revenue was +19.2%/+9.7%/-3.5%, respectively. The gross margin of the online channel increased the most. Among them, the gross margin of the online channel increased the most, mainly because the company adopted an online and offline strategy of the same price, and the online discount rate narrowed, which also affected online sales to a certain extent. Terminal retail sales are expected to continue to grow in the first quarter of 2024, while the wholesale channel will resume a relatively rapid growth rate based on healthy market inventory.
Risk warning: Brand image damage; significant inventory depreciation; increased market competition.
Investment advice: Optimistic about performance elasticity based on healthy inventory, revenue and net profit are expected to grow at the same time. Under digital empowerment and a new global retail strategy, it is expected that in 2024, store efficiency will be further improved to drive revenue growth; in 2024, on the basis of healthy inventory and along with improvements in the company's operating efficiency and cost rate control, there is room for further increase in net interest rates. As a result, we slightly raised our profit forecast for 2024-2025. The company's net profit for 2024-2026 is expected to be 1,300/1.46/16.01 billion yuan respectively (the previous value of 2024-2025 was 1.28/1.45 billion yuan), an increase of 15.6%/12.9%/10.3% year-on-year. Maintain a reasonable valuation range of 6.7-7.1 yuan, corresponding to 2024 PE 14-15x, and maintain an “gain” rating.