Introduction to this report:

The company's revenue grew steadily in 2023, and net profit to mother increased 28% year on year; however, due to continuous channel optimization since 2023, the number of offline stores has been drastically reduced, and demand for superimposed terminals is more rational, and 2024Q1 performance is under pressure in the short term.

Key points of investment:

The investment proposal takes into account the company's continued net closure, lowering the 2024-2025 EPS forecast to 1.15/1.28 yuan (1.59/1.74 yuan before adjustment), adding 1.39 yuan to 2026 EPS, giving 13 times the 2024 industry average, and lowering the target price to 14.95 yuan to maintain the “gain” rating.

Incident: 2023 revenue/net profit attributable to mothers/net profit deducted to mother were $26.5/4.9/4.6 billion, respectively, +10.4%/+28.3%/+20.5%; of these, 2023Q4 revenue/net profit to mother/net profit withheld to mother were $8.0 /0.8/110 million, respectively, +17.9%/+761.1%/+68.2% YoY. 2024Q1 revenue/net profit attributable to mothers/net profit after deduction was RMB5.4/1.1/0.7 billion, respectively, -12.0%/-33.0%/-32.3% YoY.

The performance fell short of expectations.

Revenue growth in 2023 was mainly due to improved store efficiency, and the company's profit recovered significantly. 1) By brand: The revenue of DA/DM/DZ/RA in 2023 was 14.3/1.5/1.02 billion, respectively, +8.9%/-7.4%/+14.5%/+56.1%. The number of stores was -75/-6/-13/+8, and the total number of stores in the company was -8% year-on-year. The revenue side growth mainly benefited from a significant increase in the revenue of each brand in the same store. 2) Channel division: Online/direct/franchise revenue was $4.0/11.5/1.10 billion, +29.5%/+10.6%/+4.8% year-on-year, including -36/ -50 direct/franchise stores, and gross margin +1.0/-1.4/-1.3pct year on year. In 2023, the company's gross margin was -0.9 pct year on year, but benefited from the sales/financial expense ratio of -3.2/-0.2 pct year on year, and the net margin was +2.6 pct year on year, and profit recovered significantly.

2024Q1 performance was under pressure in the short term, and high dividends showed the company's confidence in development. Due to the drastic reduction in the number of company stores in the past year, combined terminal consumption was more rational. The company's Q1 revenue side declined, and profits were under pressure. Among them, DA/DM/DZ/RA revenue was -16%/-10%/-7%/+2% compared to the same period. DA dropped significantly, and RA menswear sales resilience was excellent. In the future, as the company's channels are adjusted, performance is expected to gradually recover. Furthermore, the company continued to give back high dividends to shareholders in 2023, with a dividend rate of 77%, demonstrating confidence in future development.

Risk warning: The improvement in store efficiency falls short of expectations, and the channel adjustment progress falls short of expectations