The 2023 results were slightly lower than our expectations, and the 1Q24 results were slightly higher than our expectations. The company announced the 2023 and 1Q24 results: 2023 revenue of RMB 3,536 million, +22.6% YoY; net profit to mother of RMB 911 million, or 25.17% YoY, slightly lower than our expectations, mainly due to increased marketing expenses in the fourth quarter. 1Q24 revenue was $1,268 million, +17.6% year over year; net profit to mother was 362 million yuan, 20.4% year over year, slightly higher than our expectations, mainly due to reduced asset impairment losses due to reduced inventory reduction and inventory structure optimization. The company increased its dividend payout ratio and plans to distribute a cash dividend of 10 yuan (tax included) for every 10 shares in 2023, with a dividend rate of 62.7%, a significant increase from 23.5% in 2022.
Direct store efficiency drove growth in 2023, and the 1Q24 performance was significantly superior to peers. By channel, the company's direct revenue in 2023 was +34.6% YoY to 2,395 million yuan, with a net increase of 28 stores to 607, and average store efficiency +26% YoY to 4.04 million yuan. Franchising was relatively steady, with revenue of -2.1% year-on-year to 918 million yuan, with a net increase of 36 to 146 stores. Furthermore, online growth was maintained at a relatively rapid rate, with revenue +16.1% YoY to 195 million yuan. 1Q24 Under the pressure of the entire industry's high base, we expect good growth in the company's direct management and franchise, and the overall performance of the company is far superior to that of its peers.
Profitability continues to increase. The company's gross profit margin (excluding taxes and others) in 2023 was +1.2ppt to 78.6% year over year. The sales expense ratio was +1.2ppt to 37.1% year-on-year due to the increase in marketing promotion and new brand team building; the management expense ratio was +1.1ppt to 7.8% year-on-year due to the increase in salary and travel expenses. Overall, net profit margin was +0.5ppt to 25.8% year over year. The profitability of the 1Q24 company continued to increase, and gross margin/net profit margin for the period was +0.3/+0.7ppt to 76%/28.5% year-on-year, respectively.
Inventory turnover is accelerated, and cash is abundant. The company's inventory size was properly controlled. As of 1Q24, it was -1.2% year-on-year to 645 million yuan, or -8.9% month-on-month. At the same time, the number of inventory turnover days in 1Q24 was -40 days to 200 days year-on-year, improving turnover efficiency. In addition, the net cash flow from operating activities of the 2023 and 1Q24 companies was +37.5% and +7.3%, respectively. As of 1Q24, the company's monetary capital was +40.7% year-on-year, reaching 3.26 billion yuan, with sufficient capital reserves.
Development trends
We expect the company to accelerate its expansion in 2024, opening more than 100 new stores, while store efficiency is expected to continue to improve under high-quality development. In addition, the company said 2H24 Kent & Curwen is expected to officially launch offline stores and is looking forward to the development of the company's multi-brand and differentiated market segments.
Profit forecasting and valuation
Considering the current weak terminal consumption environment, we lowered our 2024 and 25 profit forecasts by 5.2% and 3.2% to 11.38 billion yuan and 1.355 billion yuan, respectively. The price-earnings ratio corresponding to the current stock price is 15 times/13 times, respectively. We continue to be optimistic about the company's operational resilience superior to the industry and maintain an outperforming industry rating. At the same time, the target price was lowered by 8% to 39.8 yuan, which corresponds to a price-earnings ratio of 20 and 17 times in 2024 and 25, with 34% room for improvement compared to the current stock price.
risks
Demand recovery falls short of demand, progress in store expansion falls short of expectations, and new brand cultivation falls short of expectations.