Description of the event

The company achieved revenue, net profit attributable to mother, net profit after deducting net profit of 15.9, 1.43, and 122 million yuan in Q4, with year-on-year changes of 24.5%, 92%, and 103.9%. In 2023, we achieved cumulative revenue, net profit attributable to mother, and net profit excluding non-return to mother of 52.5, 700, and 600 million yuan, with year-on-year changes of 21.8%, 52.1%, and 61.6%. Net profit for the full year was below the center of the forecast range ($69-730 million).

Dividends: Proposed cash dividend of 365 million yuan in 2023, with a dividend ratio of 52% and a dividend rate of 4%. The company announced the 2024-2026 shareholder return plan. The profit distributed in cash every year should not be less than 20% of the distributable profit achieved in the current year, and the cumulative profit distributed by the company in cash in the past three years should not be less than 30% of the average annual profit distributed in those three years. When the company's balance ratio at the end of the year exceeds 70% or the net operating cash flow for the year is negative, no cash dividends may be paid.

Incident comments

Revenue: Direct sales performed best, and the growth rate of the main brand picked up.

Looking at H2 sub-channels: Direct revenue, driven by a low base and high growth in Huggies and small brands, performed the best year over year, with group purchases benefiting from Treasure Bird's good revenue +11% (year-on-year growth rate, same below), but there was a marked decline in Q4. Franchise revenue increased +6pct to +7% month-on-month compared to H1, and franchise pick-up has been restored quarterly since H2. The e-commerce revenue growth rate of -5% is weak, mainly due to companies controlling discounts and reducing participation in online promotions, etc., but benefiting from this, the annual e-commerce gross margin was +1.8pct to 69.5%, reaching the highest profitability in recent years.

Looking at H2 by brand: Huggies and small brands are rising in the base, and growth decelerated from month to month, but they are still booming, with Hugges +19% and small brands +30%. Good News Bird benefited from a slight improvement in low-base franchise pickup, and revenue was +20% compared to the same period last year. In terms of opening stores, Hugis opened a net of 40 stores throughout the year (14 direct operations/26 franchises), and the number and structure of exhibition stores are excellent. On the other hand, after experiencing channel adjustments for H1 to join inefficient stores, H2 relaunched and expanded, opening 13 stores throughout the year, and continued to optimize quality.

Profit: Good discount control & high direct management increase boosts gross profit margin, and operating leverage & impairment reduces net profit margin.

Q4 net interest rate +3.1 pct, period expense ratio +2.8 pct, mainly due to: 1) Gross profit margin: Q4 increased share of new product sales, continued discount control and high increase in direct sales channels with high gross margin, driving Q4 gross margin +4.7pct to 64.9% year over year, H2 direct management +4.1pct/franchise-0.1pct/group purchase-1.3pct/e-commerce +1.5pct. The annual gross margin increased by 2 pcts year-on-year. 2) Impairment losses: Impairment losses in investment real estate decreased by 0.1 billion yuan. Inventory impairment losses were reduced due to the optimization of the inventory structure (the inventory ratio for more than 3 years fell from 10% in 2022 to 7% in 2023).

Outlook: Short-term retail sales are expected to improve marginally, with both long-term growth and undervaluation.

In the short term, expectations of weak retail sales and declining dividend ratios in Q1 have been fully absorbed, and improving retail margins from late March are expected to lead to a recovery in stock prices. In the long term, the company's ability to operate multiple brands has been verified. Under the optimization of the store+Haggis brand potential and group buying pattern, the growth rate is excellent and the valuation is cost-effective. The company's net profit to the mother for 2024-2026 is estimated to be 8.0, 9.1, 1.04 billion yuan, and PE is 11, 9, and 8X. Maintain a “buy” rating.

Risk warning

1. Fluctuations in the retail environment;

2. Inventory removal falls short of expectations;

3. The cost investment conversion effect is weak.