The channel adjustment strategy is progressing steadily, optimistic about steady future development, and maintaining the “buy” rating

In 2023, the company achieved revenue of 4.545 billion yuan (+16.6% YoY), net profit attributed/withheld from mother of 298 million yuan (YoY +316.8%)/270 million yuan (YoY +478.2%); 2024Q1 achieved revenue of 1,153 million yuan (-1.2% YoY), and net profit attributed/withheld from mother of 116 million yuan (+13.2%)/115 million yuan (+12.2%). Due to short-term pressure from store closures since the beginning of the year, we have lowered our 2024-2025 profit forecast and added a profit forecast for 2026. We expect net profit to be 3.66/4.34/502 million yuan (the value before 2024-2025 was 3.68/452 million yuan), corresponding EPS was 1.05/1.25/1.45 yuan, respectively, and the current stock price corresponding PE is 9.6/8.1/7.0 times. Considering the steady progress of the channel adjustment strategy, we are optimistic about steady future development and maintain a “buy” rating.

Brand side: TW is still rising steadily after closing. VGRASS is under pressure in the short term. Looking at brands, VGRASS: 2023/2024Q1 achieved revenue of 96/20 million yuan, +12.4%/-14.2%, and closed 10/9 in 2023/2024 Q1 respectively. By the end of 2024Q1, the number of stores was 188, of which 131/57 were direct-operated/franchised; TW: 2023/2024Q1 achieved revenue of 35.1/92 billion yuan, year over year +16.7%/+0.3%, net sales of 124/9 in 2023/2024Q1. As of the end of 2024Q1, the number of stores was 1,089, of which 848/241 were direct-operated/franchised; Yunjin: 2023/2024Q1 achieved revenue of 0.5/0.2 billion yuan, +120.4%/+165.6% year-on-year.

Channel side: Channel adjustments are progressing steadily. 2024Q1 franchisee continued to rise to 24.6/3.2/1.74 billion yuan in 2023, reaching +9.9%/+150.7%/+14.5% YoY; 2024Q1 direct/franchise/online reached 6.2/0.9/430 million yuan respectively, -8.7%/+125.6%/-2.3% YoY.

The gross margin remained stable and the combined expense ratio declined, and the inventory turnover continued to improve profitability: the company's gross margin in 2023/2024 Q1 was 69.2% (same year on year)/70.2% (year on year +0.8 pct); by brand, the gross margin of VGRAS/TW/Yunjin in 2023 was 74.5%/67.8%/73.6%, +1.1/-0.2/+0.7 pct, respectively. The cost rate for the 2023 period was 59.8% (-8.3pct year-on-year), with sales/management/R&D/finance expenses ratios of -6.3/-0.1/-2.0pct, respectively. The cost rate for the 2024Q1 period was 56.4% (-0.1 pct year over year), with sales/management/R&D/finance expenses ratios of -0.6/+1.0/+0.5/-1.0pct, respectively. Overall, the 2023/2024Q1 net profit margin was 6.5% (+4.7pct)/10.1% (YoY +1.3pct). Operating capacity:

The inventory balance at the end of 2023 was 920 million yuan (-19.2% year over year), and the number of inventory turnover days was 266 days (y-o-y -59 days). Net cash flow from operating activities in 2023 was $9.3 billion (+70.0% YoY).

Risk warning: Channel expansion falls short of expectations, Douyin channel expenses increase.