Key points of investment:

The company released its 2023 annual report and 2024 quarterly report, and its performance was in line with expectations. 1) The 23-year performance was in line with expectations. In 2023, the company's revenue increased 10.4% year on year to 2.65 billion yuan, and net profit to mother increased 28.3% year over year to 490 million yuan. The performance was in line with expectations. In the 23Q4 single quarter, the company's revenue increased 17.9% year-on-year to 800 million yuan, and net profit to mother turned a profit of 8.03 million yuan. 2) 24Q1 revenue is in line with expectations, and short-term performance is under pressure. 24Q1 revenue fell 12% year on year to 540 million yuan, and net profit to mother fell 33% to 110 million yuan. Revenue was in line with expectations, and net profit was slightly lower than expected. It is expected mainly due to the high base in January-January and the cold weather in March affecting seasonal demand for spring clothes, leading to a decline in revenue. Expenses rose under negative operating leverage, making the profit decline even greater. The company plans to pay a cash dividend of 8 yuan (tax included) for every 10 shares, with a dividend rate of about 77%. Combined with 40.11 million yuan of shares repurchased in 2023, the total cash dividend rate is as high as 85%.

Brand side: The two major women's clothing brands, DA and DZ, are growing steadily, and menswear continues to grow at a high rate. 1) The main brand DA grew steadily under store adjustments. In '23, DA brand revenue increased 8.9% year over year to 1.43 billion yuan, gross margin decreased 1.1 pct year over year to 75.2%, and net sales of 75 stores reached 541. 2) The DZ brand achieved double-digit growth. DZ brand revenue increased 14.5% year over year to 1.02 billion yuan, gross margin decreased 0.6 pct year over year to 72.3%, and net sales of 13 stores reached 450. 3) High-end brand DM has declined, and gross margins are progressing steadily. DM brand revenue decreased 7.4% year over year to 150 million yuan, gross margin increased 0.1 pct to 80.8% year over year, and net closure of 6 to 24 stores. 4) Menswear brand RA performed well. Revenue increased 56.1% year over year to 46.78 million yuan, gross margin decreased by 0.2 pct to 81.9% year on year, and net opening of 8 to 22 stores.

Channel side: Online e-commerce has performed well, and offline direct management is superior to joining. Direct operating revenue increased 10.6% year on year to 1.15 billion yuan in '23, the number of direct-run stores decreased by 36 to 276, and gross margin decreased by 1.5 pct year on year to 79.9% year on year. Franchise revenue increased 4.8% year on year to 1.10 billion yuan, franchise stores decreased by 50 to 761 year on year, and gross margin decreased 1.3 pct year on year to 68.1% year on year. E-commerce revenue increased 29.5% year over year to 400 million yuan, and gross margin increased by 1 pct to 76.8% year over year.

Gross margin declined slightly in '23, cost control was better, and 24Q1 net profit margin increased month-on-month. 1) Expense control drives up net interest rates. Gross margin decreased by 0.9 pct to 74.5% year over year in 2023, and 75.6% in 24Q1, an improvement over 2013. In '23, the sales expense ratio decreased by 3.2 pct to 40.5% year on year, the management expense ratio (including R&D) increased 0.2 pct to 10.3% year on year, and the net income margin increased 2.6 pct to 18.6% year on year. The 24Q1 sales expense ratio increased by 1.5 pct to 41.8% year on year, and the management expense ratio (including R&D) increased 2.8 pct to 12.9% year over year. Negative leverage was evident mainly due to the decline in revenue. The net interest rate to mother fell 6.4 pct to 20.5% year on year, but there was still an increase from 23 months on month. 2) Inventory turnover has been accelerated and operating cash flow has improved. At the end of '23, the company's inventory was 390 million yuan, up 3% year on year, and the number of inventory turnover days fell 9 days to 213 days year on year. Inventory for the first quarter of '24 was 450 million yuan, mainly related to preparations during the peak season. Net operating cash flow rose 42% to 700 million yuan in '23, the balance ratio was 19%, and asset quality was stable.

Release the shareholder dividend return plan for the next three years, focusing on shareholder returns. The company plans to distribute profits in cash to shareholders every year from 2024-2026 to no less than 60% of the net profit realized for that year. Cash flow from operating activities in '23 was 700 million yuan, up 42% year on year. 24Q1 cash and cash equivalents were $2.68 billion. There was plenty of book capital to guarantee high dividends.

The company is deeply involved in the high-end women's clothing industry, has a strong brand, stable and high profit, and maintains an increase in holdings rating. Considering that retail is still recovering weakly in the short term, we lowered our profit forecast by lowering the company's 24-25 store opening and store efficiency growth rate, and added a 26-year profit forecast. The estimated net profit for 24-26 will be $4.7/5.3/ $580 million (originally $62/710 million in 24-25), and the corresponding PE will be 13/11/10 times, respectively. For reference, the average PE of comparable companies in 24 years was 14 times, giving the company 14 times PE, corresponding to a target market value of 6.6 billion yuan. There is still room for 10% increase, maintaining the rating for increasing holdings.

Risk warning: Consumption recovery falls short of expectations; increased risk of market competition; risk of inventory backlog.