2023 results fall short of our expectations
The company announced its 2023 results: revenue of 12.22 billion yuan, a comparable increase of 13.2%; net profit to mother of 710 million yuan, a comparable increase of 264.1%, close to the median value of the previous performance forecast, lower than our expectations, mainly due to slower recovery in downstream demand than expected and intense market competition; deducting non-net profit of 640 million yuan, reversing the year-on-year loss. On a quarterly basis, Q1-Q4 revenue increased 1.6%/24.0%/6.0%/26.8%, respectively; deducted non-net interest rates were 6.7%/7.8%/4.5%/2.1%, respectively, and profitability declined in the fourth quarter.
Development trends
1. The revenue side picked up steadily, and Ole and specialty stores performed well. By business type, 1) In the company's main business, department stores, shopping centers, and Ole sales were +6.2%/+7.7%/+35.1% year-on-year, respectively, to 56.1/25.8/2.03 billion yuan. Among them, shopping centers meet the demand for experiential consumption, and the growth rate is higher than that of traditional department stores; Ole's business is leading the growth rate because of open business spaces and cost-effective products. 2) Specialty stores benefited from the increase in demand for sports and health consumption, with revenue +16.4% YoY to 1.51 billion yuan; 3) The supermarket business revenue was -18.5% YoY to 370 million yuan. We expect the main reason for this is the weakening demand for stocking and increased market competition after the epidemic. 4) In terms of tax exemption, Wangfujing International Duty Free Port has achieved cumulative revenue of 190 million yuan since opening in January. In terms of exhibition stores, the number of department stores/shopping malls/Ole stores in 2023 was 31/29/17, respectively. In total, there was a net increase of 2 over the same period last year, and the pace of exhibition stores accelerated slightly.
2. Optimization of operating leverage drives profitability restoration. The company's gross margin also increased by 3.6ppt to 41.8%. Among them, department store/shopping center/Ole were +4.8/+1.2/+5.5ppt, respectively, and the restoration of department stores and Olle was more obvious. In terms of store operations, offline customer traffic increased by more than 40% in '23, and the number of transactions increased by nearly 40%, helping to optimize operating leverage. The cost ratio also decreased by 2.9ppt to 29.7% during the period. Among them, sales and management expense ratios decreased by 0.6ppt/2.3ppt respectively. Under the combined influence, the company's net interest rate to mother also increased by 4.0ppt to 5.8%. On a quarterly basis, the Q4 net interest rate was 2.1%, down from month to month. We expect the short-term cost impact mainly due to the opening of Wangfujing Olay Uptown and Jinjie Joy Shopping Center in Q4.
3. The transformation of main business operations is gradually deepening, and tax+duty-free businesses are developing collaboratively. 1) In terms of taxable business, the company improved its operating vitality due to store policies. In 23, 6,041 brands were adjusted, with an adjustment rate of 38%, including 2,601 new brands, which helped attract and attract customers. The company is also gradually building a private traffic matrix. The comprehensive membership service applet has been launched at 41 stores, with a 26% increase in membership spending, reaching nearly 68% in total sales; 2) In terms of duty-free business, the company completed the opening of the first duty-free shop on the outlying islands, the launch of cross-border e-commerce, and the launch of experience stores during the year. Wanning Duty Free Port continues to improve business processes and investment coordination. Phase II and Phase III are being prepared. Pay attention to the recovery progress of the company's main business and the prospects for the expansion of the duty-free business.
Profit forecasting and valuation
Considering weak consumer demand and intense market competition, we lowered our net profit forecast for 2024 by 33% to $80 million, and introduced a net profit forecast of 890 million yuan for 2025. The current stock price corresponds to 18/16 times P/E for 2024/25. Maintaining an outperforming industry rating, the target price was lowered by 30% to 19 yuan based on profit forecast adjustments, corresponding to 27/24 times P/E in 2024/25, with 50% room for growth.
risks
Industry competition continues to intensify; duty-free business expansion falls short of expectations; merger and acquisition integration falls short of expectations.