Revenue increased 4.8% in the first quarter of 2024, after deducting a slight increase in non-net interest rates. The company is a domestic high-end menswear brand group. In the first quarter of 2024, the company's revenue increased 4.8% to 1.35 billion yuan, net profit to mother decreased 2.1% to 250 million yuan, and net profit after deducting non-net profit increased 6.9% to 235 million yuan. Even though the share of franchise and group buying channels with low gross margins increased, through strict control of retail discounts, gross margin increased 1.7 percentage points to 67.8% year over year, and the cost rate increased 0.7 percentage points during the period. Among them, the sales expenses ratio increased 1.4 percentage points, mainly due to increased investment in marketing activities after the Spring Festival this year.

As inventory health improved, the asset impairment loss ratio decreased by 0.6 percentage points, but other return ratios fell 2.3 percentage points year on year (mainly due to some government subsidies that may be delayed until the second quarter confirmation), and the 0.5 percentage point reduction in the net return ratio on investment had a certain impact on net interest rate. Net interest rate to mother fell 1.3 percentage points year on year to 18.5% in the first quarter, which actually increased slightly after deducting non-net interest rates.

Looking at the operating situation, the number of inventory turnover days at the end of the first quarter remained flat at 241 days, and inventory at the end of the period fell 0.6% year on year to 1.07 billion yuan. At the end of 2023, the amount of in-memory goods increased slightly to 54%.

In 2023, Huggis opened a store positively and is optimistic about the brand's growth potential. Under a prudent management strategy in 2020-2022, Hugis's store opening progressed slowly. Since 2023, Hugis has resumed a relatively fast pace of opening stores. The net opening of stores throughout the year was 9.6% year-on-year to 457, with a net increase of 26 stores in the second half of the year compared to the first half of the year. In the medium to long term, brand store holdings still have a lot of room to expand compared to competing products.

Risk warning: repeated epidemics, damage to brand image, channel expansion falling short of expectations, systemic risks.

Investment advice: Steady growth on a high base, good operating quality, and continued optimism about medium- to long-term growth prospects.

In the first quarter of 2024, revenue growth was steady on a high basis, inventory was healthy, retail discounts narrowed, and non-net interest rates increased. Looking ahead to the medium to long term, the Huggis brand is positioned as a pan-sports and leisure boom and continues to maintain a good momentum of store opening and expansion. The growth potential of the new brand Le Fei Ye is gradually showing, and Happy Bird and Treasure Bird are expected to grow steadily. Maintaining the profit forecast, net profit from 2024 to 2026 is expected to be RMB 8.1/9.2/1.04 billion, respectively, up 15.8%/14.4%/12.5% year-on-year. Maintain the target price of 8.0-8.5 yuan, corresponding to 2024 PE 14.4-15.4x, and maintain the “buy” rating.