The company released its 2023 annual report. Revenue for the full year of 2023 was 8.905 billion yuan, up 39.45% year on year; net profit to mother was 1,194 billion yuan, up 46.06% year on year, and net profit after deducting non-return to mother was 1,174 billion yuan, up 48.91% year on year. The diluted EPS was 2.97 yuan; the weighted average return on net assets was 29.94%, and the net operating cash flow was 1,469 million yuan, up 32.19% year on year.
The company released its 2024 quarterly report. The first quarter achieved operating income of 2.82 billion yuan, up 34.56% year on year; net profit to mother was 303 million yuan, up 45.58% year on year; deducted non-net profit of 292 million yuan, up 47.50% year on year; and diluted EPS of 0.75 yuan. The weighted average return on net assets was 6.89%, and net operating cash flow was $431 million, up 5.15% year over year.
The company plans to distribute a cash dividend of 9.1 million yuan (tax included) to all shareholders for every 10 shares, with a total cash dividend of 359 million yuan (tax included); the company has distributed 23 mid-year dividends and 0.38 yuan (tax included) for every 10 shares to all shareholders, for a total cash dividend of 151 million yuan (tax included). In addition, the company repurchased shares worth 39 million yuan through centralized bidding. In the end, cash dividends accounted for 45.98% of net profit to mother in '23.
Brief review and investment advice:
1. Revenue and profit increased 30% + year on year, and multiple brands entered healthy growth. Revenue in 2023 was 8.905 billion yuan, up 39.45% year on year; net profit to mother was 1,194 billion yuan, up 46.06% year on year, and gross margin increased 0.23 pct to 68.12%, mainly due to the increase in the share of direct online operations. Single 4Q revenue was 3.656 billion yuan, up 50.86% year on year; net profit to mother was 448 million yuan, up 39.06% year on year. 1Q24's revenue was 2.82 billion yuan, up 34.56% year on year, net profit to mother was 303 million yuan, up 45.58% year on year, net profit after deducting non-return to mother was 292 million yuan, up 47.50% year on year, and gross profit margin was 70.11%, up 1.96 pct year on year.
(A) Channel division: In 2023, the company continued to promote the strategy of focusing on online channels and parallel offline channels. Online revenue was 8.274 billion yuan, an increase of 42.96% over the previous year, accounting for 93.07%, of which direct online business accounted for 75.91%, an increase of 5.51 pct; offline revenue was 616 million yuan, up 7.35% year on year.
(B) By brand: In 2023, the main brand Perea achieved revenue of 7.177 billion yuan, up 36.36% year on year, accounting for 80.73%; Caitang achieved revenue of 1,001 billion yuan, up 75.06% year on year, accounting for 11.26%; OR/Yuefti/other brands achieved revenue of 2.15/3.303/194 million yuan respectively, accounting for 2.42%/3.41%/2.18% respectively.
(C) By category: In 2023, revenue from the skincare category (including skin cleansing) was 7.559 billion yuan, up 37.85% year on year, accounting for 85.03%; the average sales price of 1Q24 products was 73.28 yuan/branch, an increase of 51.00% year on year, mainly due to changes in the sales share of large single products (essences and creams) with high unit prices. Cosmetics revenue was 1,116 billion yuan, up 48.28% year on year, accounting for 12.55%; the average sales price of 1Q24 products was 99.06 yuan/piece, up 22.74% year on year, mainly due to the increase in revenue share of Caitang. Revenue from the care category was 215 million yuan, up 71.17% year on year, accounting for 2.42%; the average sales price of 1Q24 products was 103.92 yuan/piece, an increase of 57.69% year on year, mainly due to changes in sales share of large single products (essences and essential oils) with high unit prices.
2. New brand incubation and online promotion have increased, and operating efficiency has been stabilized. The cost rate increased by 0.89pct to 51.01% during 2023, and the single 4Q increased by 2.42ct to 51.96%. Among them, the sales expense ratio increased by 0.98 pct to 44.61% year on year, and the main reason was the increase in investment in new brand incubation and brand promotion expenses; the management fee ratio decreased by 0.01 pct to 5.11% year on year and 0.84 pct to 4.62% in single 4Q; the R&D cost ratio decreased 0.06 pct to 1.95% year on year, and 0.12 pct to 1.22% year on year; in the end, the overall cost ratio increased by 0.89 pct to 51.01%.
1Q24 sales expense ratio was 46.84%, up 3.62 pct year on year; management expense ratio was 4.46%, down 1.41 pct year on year; R&D expense ratio was 2.15%, down 1.05 pct year on year. The final period cost rate increased by 1.58pct year-on-year to 53.01%.
3. Net profit to mother increased 46% year on year, and net interest rate increased steadily. In 2023, the company's net investment income was 17.39 million yuan, asset impairment losses - 108.1 million yuan, credit impairment losses - 10.4 million yuan, asset disposal profit and loss - 700,000 yuan, and other operating income totaled 45.3 million yuan. In addition, the effective tax rate was reduced by 3.45 pct to 17.69%, and the profit and loss of minority shareholders was 36.94 million yuan. In the end, net profit due to mother increased by 46.06% to 1,194 billion yuan in 2023, and net profit after deducting non-return to mother increased by 48.91% to 1,174 billion yuan.
4. Business review (1) A multi-category and multi-brand matrix was initially established, and large single products continued to grow. ① Perea: Fully upgrade the core products and build an exclusive ingredient barrier. In 2023, Perea ranked 1st in the essence category, 1st in the cream category, 2nd in the mask category, and 5th in the eye cream category. It launched the first high-end product line “Energy Series” on the Tmall platform, using Cellergy, an exclusive energy revitalization technology, to focus on anti-aging solutions for mature skin. ② Caitang: Consolidate the matrix of major products in the facial makeup category. The core products all rank at the top of all categories. Among them, the three-color concealer ranked first in the Tmall highlighter category, and the three-color concealer ranked first in the Tmall concealer category. ③ Off&Relax: Continuously increase the market penetration rate of core explosives, establish and deepen the brand “Asian Scalp Health Expert” image, and launch advanced oil control series and anti-loss series. ④ Yuefuyu: Continuously improve the brand's “Oily Skin Care Expert” perception, continuously expand from basic products to effective products based on the needs of oily skin users, and improve the oily skin care process.
(2) Refine operation efficiency and optimize delivery structure. ① Online: Tmall continues to boost the penetration of mature products, strengthen platform resource IP cooperation, and focus on building loyalty brand mentality, further leveraging user mentality with points and increasing the frequency of repeat purchases with point product strategies; Douyin strengthens global operations, completes the transformation and efficiency of accounts, lays out 6 major account matrices, and divides accounts by product lines to achieve population segmentation; in '23, GMV ranked 3rd in Douyin Beauty and 2nd in domestic products. ② Offline: The daily chemical channel uses brand potential to stabilize channel stock and increase the intensity of cooperation with major customers. At the same time, it is actively seeking market growth and expanding cooperation with new types of shopping malls; optimizing the store structure and promoting the transformation of the head system to a direct management model; improving the training system for counter consultants and improving retail management skills to increase average counter sales.
(3) Digital application & talent reserve to enhance organizational vitality. ① Mechanism-building: Establish a front-center and back-office cooperation model, deepen the application of digital technology, and build a flexible and efficient organizational operation mechanism. Deepen the “three highest” value return concept of “high investment, high performance, and high return”, and establish a diverse and effective business incentive system around business strategy. ② Talent development:
The dual-channel promotion management mechanism provides a perfect growth channel for professional talents and management talents, enhances organizational vitality and talent pool, and creates a dynamic, self-driven and creative young team.
(4) Basic research and development accelerates the layout of new raw materials and reserves long-term momentum. The company continues to improve the R&D network in all key aspects from the raw material side to the finished product side, and continues to focus on skin texture research, active substance design and efficacy verification. 2H23 released the first patented cyclic peptide ingredient in Chinese beauty, leading the industry's new exploration of self-developed ingredients; in 2023, it obtained 41 new patent authorizations and applied for 47 new patents. By the end of 2023, it had 256 patents, leading or participating in the formulation of 17 national standards, 4 light industry standards, and 26 group standards. In 2024, the R&D system will continue to be improved and upgraded, and advanced cross-industry technologies such as computational biology, genomics, and proteomics will be used to empower it.
Maintain judgment on the company. In recent years, the company has built a self-driving organization with efficient collaboration between the front, middle, and back offices with “product, content, operation”, etc., and is progressing steadily along the multi-brand and multi-category path. A restricted equity incentive plan was announced in July 2022. It is optimistic about the strength of efficient organizations under self-iteration, and new brands and multiple categories will open up room for growth. In the current environment where industry differentiation is intensifying and the Matthew effect is prominent, the definitive value of the company's medium- to long-term growth is particularly prominent.
Update profit forecasts. We expect the company's revenue for 2024-2026 to be 11.118 billion yuan, 13.712 billion yuan and 16.749 billion yuan, up 24.9%, 23.3%, and 22.1% year on year; net profit to mother of 1.10 billion yuan, 1,865 billion yuan, 2,298 billion yuan, respectively, up 26.5%, 23.2% year on year, and EPS 3.81 yuan, 4.70 yuan, and 5.79 yuan respectively.
Referring to the valuation of comparable companies, considering that the company is a leader in new domestic beauty products, the company continues to strengthen its comprehensive strength around the “6*N Strategy”, and the flat and modular mesh organization makes its decision-making ability and operational efficiency higher. Comprehensive reference is given 30-35 times PE, corresponding to a reasonable market value of 453-52.8 billion yuan, with a reasonable value range of 114.16-133.19 yuan, maintaining the “superior to the market” rating.
Risk warning: R&D and innovation fall short of expectations, new product development and registration risks, and increased market competition.