The 2023 results fell short of our expectations, and the 1Q24 results were higher than our expectations

The company announced its 2023 annual report and 1Q24 results: revenue of $3,055 billion in 2023, +16.6% year on year; net profit to mother of $191 million, turning a year-on-year loss into profit, after deducting net profit of 241 million yuan, lower than our expectations, mainly due to increased sales expenses exceeding our expectations. 1Q24 revenue was 940 million yuan, +21.7% year over year; net profit before mother was 108 million yuan, +11.3% year over year; net profit after deduction of non-return to mother was 119 million yuan, +95.4% year over year. The gap between net profit after deducting non-net profit and net profit to mother was mainly affected by changes in the fair value of financial assets, which was higher than our expectations, mainly due to direct management growth rates higher than our expectations.

The results of the changes continued to be evident in 2023, and gross margins continued to be optimized.

By brand, Jiumuwang/FUN/ZIOZIA's revenue was +20.0%/-23.7%/+19.7%, respectively. Thanks to the recovery in consumer demand and prominent transformation effects, Jiumuwang's revenue reached a record high.

By channel, direct management changed faster, with revenue +34.9% YoY to 1,167 billion yuan, and the revenue share continued to increase; franchise growth was steady, with revenue +9.7% YoY to 1,391 billion yuan. In 2023, Jiumuwang continued to break through high-quality channels. The number of shopping center stores increased to 20%, and the number of teenage stores was close to 1,300, accounting for more than 50%. The average store area reached 156 square meters, and the store efficiency continued to improve.

The gross margin in 2023 was +4.1ppt to 63.6% year-on-year, mainly due to an increase in the share of direct sales channels, good terminal discount control, and an increase in the share of high-end product sales. In terms of expenses, thanks to the scale effect brought about by revenue growth, sales/management/R&D expense ratios were -0.6/-0.8/-0.2ppt to 36.6%/7.3%/1.6%, respectively. The company reversed losses in 2023, with a net interest rate of 6.3% to mother.

Direct management increased dramatically in 1Q24, and operating efficiency improved steadily. 1Q24's direct revenue was +54.4% to $440 million, mainly due to the high proportion of department stores in the company's direct management channels, settlement was delayed by about 1 month, and the 1Q23 base was relatively low; franchise revenue was +9.2% to 409 million yuan. Due to the high gross margin of direct management, the increase in the share of direct sales led 1Q24 gross margin to +4.4ppt to 65.0% year over year.

The 1Q24 sales/management expense ratio was -3.6/-5.0ppt to 28.7%/4.8% year on year, respectively, but due to fair value changes, the net profit margin for 1Q24 was -1.1ppt to 11.5% year on year.

Development trends

Short-term 2Q24 expenses may put some pressure on profits, but we are still optimistic about the company's growth throughout the year: in terms of organization, the company's excellent successors and the new general manager of the division; in terms of products, the company's “five pants” matrix occupies market share; in terms of channels, the company expects a net increase of 50-100 stores throughout the year, and 300-400 new ten-generation stores will be opened+rectified.

Profit forecasting and valuation

Considering the increase in brand promotion expenses, we lowered the company's 2024/2025 profit forecast of 17.7%/6.8% to RMB 3.31/478 billion. The current stock price corresponds to 17.4x/12.1xP/E in 2024/25, respectively, to maintain the outperforming industry rating, and maintain the target price of 13.10 yuan, corresponding to 22.7x/15.7 times P/E in 2024/2025, with 30.3% upside compared to the current stock price.

risks

Terminal demand falls short of expectations, new product strategies fall short of expectations, risk of inventory impairment, and risk of investment loss.