The 2023 results fell short of our expectations, and the 1Q24 results were in line with our expectations. The company announced 2023 and 1Q24 results: 2023 revenue of $2.92 billion, +21.7% YoY; net profit to mother of $110 million, +416.6% YoY. The 2023 results fell short of our expectations, mainly due to overseas business losses and impairment of goodwill and trademark usage rights, and domestic business profits are in line with our expectations. The company announced a dividend of 0.24 yuan/share, with a dividend rate of 82.6%. The dividend ratio has increased, corresponding to the current stock price dividend rate of 3.0%. 1Q24 revenue was 750 million yuan, +12.5% YoY; net profit to mother was 29.19 million yuan, -38.2% YoY. The 1Q24 results were in line with our expectations.
Domestic business performance in 2023 surpassed the same period in 2021, hampered by impairment of goodwill and losses in overseas business. The company's revenue in 2023 was +21.7% YoY, up 23.4% from 2021. The company maintained the trend of store expansion. In 2023, direct-managed/franchised stores were +44/ -5 compared to the same period, respectively, and single-store efficiency recovered well.
In terms of profit, after excluding the impact of goodwill and trademark usage rights and overseas business losses, we estimate that the net profit of domestic business will exceed 300 million yuan in 2023, which is higher than in 2021.
1Q24 domestic business performed well, and the main brand and the three major international brands continued to grow. By brand, the 1Q24 ELLASSAY/ Laurèl/ Ed Hardy/ IRO Paris/ self-portrait brand revenue was +29.5%/+40.2%/-14.1%/-7.9%/+11.9%, respectively. Among them, ELLASSAY's high increase was mainly due to the increase in franchise shipments and customized revenue repayments in 1Q24. We estimate that IRO Paris grew by more than 20% in China. By channel, 1Q24 offline direct/offline franchise/online revenue was +23.2%/-26.8%/+33.7%, respectively. The number of offline direct-operated/franchise stores was +1/+2 at the end of 2023 to 505/150, respectively.
Net profit from domestic business remained flat in 1Q24, and overseas losses continued. 1Q24 gross margin was +1.7ppt to 67.3% year over year, continuing the upward trend since 2023. In terms of expenses, the sales expense ratio was +2.2ppt to 46.8% year-on-year, mainly due to the rigidity of overseas business expenses; the rest of the expenses were controlled smoothly. Overall, the 1Q24 net profit margin was -3.2ppt to 3.9% year over year. Looking at the segmented regions, we estimate that net profit from domestic business was basically the same year on year in 1Q24, and overseas losses deepened year on year.
Development trends
We expect that in 2024, the efficiency of newly developed stores in the domestic business is expected to rise, and profit margins are expected to increase under operating leverage; overseas store revenue is affected by factors such as inflation, and we expect profits to be affected more than revenue. We recommend that we keep a close eye on the progress of the company's overseas business.
Profit forecasting and valuation
Considering the uncertainty of the company's overseas business environment, we lowered our 2024 profit forecast by 40% to 220 million yuan and introduced a profit forecast of 330 million yuan for 2025. The current stock prices correspond to 13.2x/8.7x P/E for 2024/25, respectively. Maintaining an outperforming industry rating, the target price was lowered by 40% to 8.25 yuan, corresponding to 14.0x/9.2x P/E in 2024/25, respectively, with 6% upside compared to the current stock price.
risks
Overseas business conditions fell short of expectations, store efficiency and store opening growth fell short of expectations, and investment returns fell short of expectations.