Introduction to this report:

Domestic business performance was steady in 2023, and overseas business dragged down the company's performance; 2024Q1 overseas business pressure continued, and performance was under pressure in the short term. The company actively strengthened channel management, and performance is expected to gradually improve.

Key points of investment:

Investment advice: Considering that overseas business profits are lower than expected, the 2024-2025 EPS forecast was lowered to 0.61/0.84 yuan (0.85/0.98 yuan before adjustment), and the 2026 EPS was added to 1.03 yuan. Considering the company's high performance flexibility, the 2024 PE was given 17 times higher than the industry average, and the target price was maintained at 10.20 yuan to maintain the “gain” rating.

Incident: 2023 revenue/net profit attributable to mothers/net profit deducted from mother were $29.15/1.06/80 billion, respectively, or +21.7%/+416.6%/+1515.1%; of these, Q4 revenue was 850 million yuan, +30.9% year over year, and net profit attributable to mothers/net profit/deducted non-return to mother was -0.31/-47 million yuan respectively, all with year-on-year losses.

2024Q1 revenue/net profit attributable to mothers/net profit after deduction was $749/0.29/30 million yuan, respectively, or +12.5%/-38.2%/-26.4% year-on-year. Q1 Performance fell short of expectations.

Domestic business performance was steady in 2023, while overseas business dragged down performance. In 2023, the company's revenue was +22% year over year, and gross margin was +4pct year over year. Its revenue in China was 2,427 billion yuan, +28.5% year over year, and gross margin increased by 5 pct; overseas revenue was 488 million yuan, -3.5% year over year, and gross margin decreased by 1.5 pct. By brand, the revenue growth rate of the Laurel and SP brands reached 47%/50%, and the revenue of the main Golix brand IRO/EH increased 21%/10%/3%. The gross margin of each brand improved year on year. Apart from the contraction in the number of EH stores, the number of each brand's stores is growing. Among them, directly/franchise stores are +44/ -5 compared to the same period last year. Furthermore, due to the impact on IRO's overseas business operations, the company calculated an impairment of 120 million yuan in goodwill. If this factor is excluded, the net profit to the mother is estimated to reach 225 million yuan.

2024Q1 is still under pressure from overseas business, putting pressure on short-term results. Q1 Domestic brands maintained relatively rapid growth, and overseas revenue declined by about 20% year on year. The company's gross margin was +1.7 pct year on year, continuing the good trend, but due to the rigidity of overseas business expenses, the sales expense ratio was +2.2 pct year over year, and overseas business losses deepened year on year, which dragged down the company's performance. Looking ahead to the whole year, the company will continue to optimize IRO's overseas stores to reduce the negative impact on overseas business, while domestic business is expected to continue to grow rapidly.

Risk warning: Overseas business improvements fall short of expectations, and domestic store expansion progress falls short of expectations