We believe that Taobo's short-term weak revenue performance is basically reflected in the stock price. At the same time, we believe that the company's low valuation level and high dividend rate, combined with its excellent fundamentals and cash flow, provide strong defense for Taobo's stock price and can support Taobo's stock price to maintain steady stock price performance in the future. Taobo's target price was lowered to HK$7.0, maintaining Taobo's “buy” rating.

The current stock price already reflects a weak revenue trend since 2024: based on weak terminal demand and a high base, we expect Taobo's January-January revenue to decline slightly by a lower number of units over the same period last year, which is basically in line with the industry's performance. Combined with the rapid revenue growth on top of a low base in December 2023, we forecast the number of units in the overall revenue growth of Taobo 4QFY24 over the same period last year. We expect Taobo's March revenue to continue the slight decline in January-January, but the decline was far less than that of its main peers (Baosheng). The company's inventory remained at a healthy level. At the end of February, the inventory sales ratio remained at 4-5x, and new products within 6 months accounted for about 80% of the total inventory. Since entering 2024, Taobo's revenue growth rate has been weaker than market expectations. Since 2024, its stock price has fallen by more than 9%, and its performance is weaker than that of major domestic sportswear brands. We believe that Taobo's current stock price basically reflects the market's more rational expectations for Taobo's 4QFY24 revenue and FY24 performance.

FY24 profit forecast: We predict that Taobo FY24 revenue will grow by a high number of units year over year (meaning 2HFY24 revenue will increase by a high number of units year over year). We expect FY24 gross margin to record a year-over-year expansion (compared to 1HFY24) due to improved retail discounts and a declining base of brand subsidies. At the same time, continued improvements in operating efficiency are expected to cause the FY24 operating expenses ratio to record a significant contraction year over year, but the decline in other revenue (mainly government subsidies) will partially offset the positive impact of the expansion of gross margin and the improvement in expense ratios. We forecast that FY24's EBIT will increase 20% year over year, EBIT margin will expand by 1ppt to 10.0% year over year, net profit to mother will increase 20% year over year to RMB 2.2 billion, and net profit margin to mother will expand 70 bps year over year.

Strong defense and balance between offense and defense: After experiencing a wave of stock price declines at the beginning of the year, according to our predictions, Taobo's valuation has now returned to a low level (12.7x FY25 P/E), and the FY25 dividend yield (Dividend Yield) has risen to 7.9%. The combination of undervaluation and high dividends combined with Taobo's solid fundamentals and strong operating capabilities, while bringing a steady return on investment, together provides strong defense for Taobo's stock price. At the same time, aside from the weak short-term revenue trend, the continued recovery of international brands, the strength of new outdoor brands (Hoka, Kailas, etc.), the expansion of the number of stores, the increase in retail channel share, and the continuous improvement of operating efficiency are expected to inject momentum into the company's profit growth.

Investment risk: Industry demand is slowing down and brand competition is greater than expected.