The 2023 results fell short of our expectations, and the 1Q24 results were in line with our expectations of 2023 and 1Q24 results: 2023 revenue of $5.522 billion, +10.1% year over year; net profit to mother of $757 million, -28.0% year over year; 1Q24 revenue of $1,097 million, +27.1% year over year, attributable to mother/net profit of $177/154 million, respectively, +11.7%/+21.9% year-on-year, respectively. Non-recurring profit and loss are mainly income from entrusted financial management investments and changes in fair value. The 2023 results fell short of our expectations, mainly due to increased competition in the industry and increased marketing investment. Among them, Q4 revenue/net profit ratio was -1.3%/-66.7%; 24Q1 results met our expectations, and the month-on-month improvement momentum was obvious.
Development trends
1. The main brand Winona continues to expand, and the cultivation of sub-brands is progressing steadily. ① By brand: In 2023, the main brand Winona maintained a positive and steady increase in revenue to 5.2 billion yuan in the face of multiple adverse factors such as team adjustments and increased competition. The brand was deeply involved in the field of sensitive skin care and continued to expand the “sensitive skin PLUS” product strategy. The performance of the large single product “face cream lotion+sunscreen” was stable, confirming the vitality of the product. “Whitening bottle”, “freeze-dried mask”, etc. were quickly launched on the Douyin channel and continuously improved the product and efficacy matrix; Winona's revenue increased rapidly by 47.5% year-on-year to 150 million yuan. Top 5 cat baby skin care categories; In addition, AOXMED's revenue was 0.36 million yuan, and the new merger and acquisition brands, Ji Rui/Pomei, contributed 0.90/0.14 billion yuan respectively in 2023; ② Subchannel: Online revenue in 2023 was basically the same, with the Douyin channel showing impressive performance of +47% year over year, confirming the team's further optimization of the operating model of the new channel; OMO/offline revenue was +10%/+49% year over year to 523/1,427 million yuan, respectively.
2. Marketing expenses and construction of new plants drag down profit margins. The company's gross margin in 2023 was -1.3ppt to 73.9% year-on-year, mainly due to increased costs of product and packaging upgrades and increased depreciation and amortization; the period expense ratio was +7.3ppt year-on-year, mainly due to the company's increased brand promotion and e-commerce channel marketing, and the sales expense ratio was +6.4ppt to 47.3% year-on-year. Under the combined influence, the company's net profit margin in 2023 was -7.3ppt to 13.7% year-on-year. The net margin for 1Q24 was 16.1%, -2.2ppt/month-on-month.
3. The release of employee stock ownership plans shows confidence in development, and the arrival of the new executive team is expected to gain further strength. The board of directors of the company reviewed and passed the “Proposal on Hiring the Company's Senior Deputy General Manager and Deputy General Manager” to further introduce market-based talents and optimize the functional structure. At the same time, the 2024 employee stock ownership plan (draft) was announced. The total number of participants was 249, including 2 directors, 1 other executive, 246 core managers and key executives (including Ms. Zhang Mei, Ms. Zhou Wei, Mr. Wang Long, etc.); the transfer price was 33.43 yuan/share, and the total number of transferred shares did not exceed 1,363,500 shares (about 0.32% of the total share capital); the duration period was 24 months, and the locked up period for the shares obtained was 12 months. With the rationalization of the team and structure and the implementation of supporting incentive mechanisms, we believe it is expected to drive the company's operating momentum back to a rapid growth path.
Profit forecasting and valuation
In view of increased competition in the industry, we lowered our 2024/2025 net profit by 21% and 19% to $1,15/1.4 billion. The current stock price corresponds to 21x/17x 2024/2025 price-earnings ratio. Maintaining an outperforming industry rating, but due to adjustments in profit forecasts, we lowered our target price by 18% to 82 yuan, corresponding to 30x/25 times the 2024/2025 price-earnings ratio, with 43% upside compared to the current stock price.
risks
Competition in the industry continues to intensify, marketing costs are growing rapidly, and sub-brand expansion falls short of expectations.