2023 results fall short of our expectations
The company announced 2023 results: revenue of 2.76 billion yuan, -8.4% year on year; net profit to mother of 42 million yuan, +28.6% year over year. Among them, 2H23 achieved revenue of 1.39 billion yuan, -0.1% year-on-year, which was significantly narrower than 1H23. Net profit to mother was 0.16 billion yuan, or -28.6% year-on-year. The company's 2023 performance fell short of our expectations, mainly due to the fact that revenue growth was lower than our expectations due to joining prudent shipping, and the fee rate control margin was lower than our expectations due to the reduction in revenue scale.
Improvements in retail business, prudent shipments by franchising, and integration of e-commerce channels led to a decline in overall revenue. By channel, revenue from the company's offline owned and associated stores was +17.6% to 1.21 billion yuan in 2023, and in-store consignment revenue decreased from 240 million yuan in 2022 to 0, mainly due to the company's active termination of business and -3.1% year-on-year to 9.1 billion yuan. Mainly because the company controlled shipments to reduce franchisee inventory pressure since 2H22, online revenue was -22.4% to 5.2 billion yuan, which is still in the adjustment stage.
In terms of channels, the company strengthened its penetration into the sinking market, and the number of franchise and joint venture channels increased net by 300+ stores throughout the year.
Product sell-outs and increased discounts drive an increase in gross margin, and actively control fees to increase profit levels. In 2023, the company's gross margin was +1.0ppt to 47.5% year-on-year, mainly due to increased product sell-outs and reduced discounts. In terms of expenses, the company strengthened accurate marketing, streamlined the structure, and improved human efficiency. Under the reduction in revenue scale, the sales/management expenses ratio was -0.4pp/+0.1ppt to 40.0%/7.1% year-on-year, respectively. The reduction in interest expenses on bank loans led to a year-on-year financial expense ratio of -0.1ppt to 0.8%. Overall, the 2023 net profit margin was +0.4ppt to 1.5% year-on-year.
Inventory levels have declined and the structure has improved. In 2023, the company controlled inventory levels and improved the inventory structure. The number of inventory turnover days was -22 days to 166 days year on year, and the share of inventory that had been listed for more than 1 year decreased by 17.8ppt to 42.5%. In addition, the company's bank balance and cash were approximately $682 million, and bank loans were approximately $392 million.
Development trends
Management guides the target of opening 1,000 new franchise/joint ventures and about 100 new direct-run stores in 2024. We expect net store opening to drive revenue growth, while operating leverage is expected to drive profit margins.
Profit forecasting and valuation
Considering that franchisee confidence is still gradually recovering, we lowered our 2024 profit forecast by 57.4% to 60 million yuan, and introduced a profit forecast of 83 million yuan for 2025. The current stock prices correspond to 7.8x/5.4xP/E for 2024/25, respectively, and maintain a neutral rating. Taking into account the profit reduction and valuation switch to 2024, the target price was lowered by 35.7% to HK$0.26, corresponding to 8.0x/5.8XP/E in 2024/25, with room for 12.1% increase compared to the current price.
risks
Sales at newly opened stores fell short of expectations, inventory removal fell short of expectations, and competition in the industry intensified.