1Q24 results were slightly lower than our expectations
The company announced 1Q24 results: revenue of 1,353 billion yuan, 4.8% year on year; net profit of 250 million yuan, -2.1% year on year; net profit after deducting non-net profit of 235 million yuan, 6.9% year on year. The net profit after deducting non-net profit was in line with our expectations, but net profit to mother was affected by government subsidies and was slightly lower than our expectations.
Under the high base, terminals were under pressure as scheduled, and the treasure bird boom continued. Faced with the high consumption base after the release of the 1Q23 epidemic, the terminal turnover of the two major brands of the 1Q24 company was under pressure. We expect Huggs' revenue to increase slightly year over year during the period, and Good News Bird will benefit from the franchise's shipping revenue and maintain a slight year-on-year increase. Treasure Bird continues its boom in 2023, and we expect double-digit year-on-year revenue growth.
Gross profit margin reached a record high, and government subsidies lowered net interest rates. 1Q24's gross margin reached a record high of +1.7ppt to 67.8% year-on-year, mainly due to the company's effective control of terminal discounts. In terms of expenses, 1Q24's sales expense ratio was +1.4ppt to 36.2% year-on-year, mainly due to the return to normal offline activities and investment, and the increase in bonuses. Management and R&D expense ratios were generally stable, +0.1, -0.1ppt to 6.2%, and 1.6%, respectively. The financial expense ratio benefited from an increase in interest income from time deposits, and -0.7ppt to -0.8% year over year. In addition, other revenue decreased by $28.41 million year-on-year due to a reduction in government subsidies. Overall, the company's net profit margin was -1.3ppt to 18.5% year-on-year.
Steady operations and abundant cash. The inventory size of the 1Q24 company was -0.6% year over year to 1,069 billion yuan, the number of inventory turnover days was +1 day to 241 day year on year, and the number of accounts receivable turnover days remained flat at 45 days year on year. Overall operation was steady. Net cash flow from operating activities during the period was -88% year-on-year to $18 million, mainly due to year-on-year increases in bonus payments, product purchases, and taxes. However, cash and cash equivalents were abundant at the end of the period, up +41.6% year over year to $2,359 million.
Development trends
We believe that in a situation where all industries are facing market pressure, the company has shown excellent operational resilience. In the future, terminals are expected to resume good growth as the pressure on the base decreases. At the same time, we expect the company to continue its expansion trend throughout the year. Haggis will maintain its double-digit store opening plan, and Happy Bird will continue to improve its operational quality and brand power.
Profit forecasting and valuation
Considering that the short-term terminals of clothing brands are facing a high base, we lowered the company's profit forecasts for 2024 and 2025 by -3.4% and -5.4% to 804 million yuan and 923 million yuan, respectively. The current stock price corresponds to 2024/25 10.1x and 8.8xp/E, maintaining an outperforming industry rating. At the same time, we lowered our target price by 5.9% to 7.22 yuan, corresponding to 13.1x and 11.4xP/E in 2024 and 2025, respectively. There is 30.1% upside compared to the current stock price.
risks
Channel expansion falls short of expectations, terminal demand falls short of expectations, and cost control falls short of expectations.