Incident Overview

In 2023, the company achieved revenue/net profit attributable to mothers/ net profit deducted from mother of 29.15/1.06/0.80/480.80 billion yuan, an increase of 21.73%/416.56%/1515.12%/52.71% year-on-year, not taking into account the impact of goodwill impairment preparations and trademark use impairment preparations (119 million yuan). Net profit to mother in 23 was 225 million yuan, an increase of 1000% year on year, and domestic net profit basically recovered to the level of 21. Non-financial resources are mainly government subsidies of $11 million (down 62% year over year) and other profit and loss items that meet the definition of non-recurring profit and loss of $0.14 billion (0 in '22). Operating cash flow is higher than net profit mainly due to asset impairment losses, depreciation, and increased accounts payable. 2023Q4 Company's revenue/net profit attributable to mothers/net profit deducted from non-mother was 8.50/-0.31/-47 billion yuan respectively, up 30.88%/49.75%/29.40% year-on-year. Net profit losses were mainly due to increased asset impairment losses. A cash dividend of $2.4 is proposed for every 10 shares, with a dividend rate of 82.6% (30.23% in '22) and a dividend rate of 3.0%.

The 2024Q1 company's revenue/net profit attributable to mothers/net profit after deduction was $749/0.29/30 million yuan, up 12.47%/-38.25%/-26.38% year over year.

The decline in net profit due to mother was mainly affected by overseas markets.

Analytical judgment:

Domestic business grew steadily, and LAUREL's strategy showed results. Revenue split: (1) By brand, LAUREL23 had the highest annual growth rate, mainly due to the establishment of a “lightweight suit” strategy focusing on the core category, IRO brand declined in Europe but achieved 58% sales growth in China; in 2023 Ellassay/Laurel/EH/IRO/Self-Portrait revenue was 10.72/3.48/3.08/7.30/418 million yuan, up 20.68%/47.23%/2.98%/10.48%/10.48%/ 49.92% (2) By channel, online/offline sales revenue in '23 was 393/2,486 billion yuan, up 12.04%/23.50% year on year; direct operation/franchise revenue was 23.98/481 million yuan respectively, up 21.80%/12.23% year on year. By the end of '23, the company had 504/148 direct-operated/franchised stores, respectively, and 44/- 5 net stores respectively. It is estimated that direct store effectiveness/single store shipments in '23 were 476/3.25 million yuan respectively, a year-on-year decrease of 13%/16%. At the end of '23, the number of main brand/LaRuel/EH/IRO/self-portrait/other direct stores was 198/74/65/110/56/1, with a net opening of 1/8/3/15/16/1, respectively; the number of main brand/LARUEL/EH/IRO franchised stores was 103/13/30/2, respectively, with a net opening of 3/1/-9/0 stores, respectively. (3) 24Q1's Ellassay/Laurel/EH/IRO/Self-Portrait revenue was 3.06/0.95/0.69/1.56/116 million yuan, up 29.47%/40.19%/-14.05%/-7.86%/11.92% year-on-year. By channel, 24Q1 direct/franchise revenue was 633/110 million yuan respectively, up 25%/-27% year on year; offline/online channel revenue was 6.30/ 113 million yuan respectively, up 10%/34% year on year.

The increase in net interest rate was lower than gross profit margin, mainly due to accrued impairment of goodwill. (1) The gross margin for '23 was 67.79%, up 3.98 PCT year over year. The increase in gross margin mainly comes from the main brand and EH: Ellassay/Laurel/EH/IRO/Self-Portrait gross margin was 71.33%/74.41%/55.81%/60.87%/82.84%, respectively, up 4.26/2.75/9.22/2.19/0.30PCT year-on-year. The net profit margin for '23 was 3.62%, up 2.77PCT year-on-year. Looking at the cost ratio, the 23-year sales/management/ R&D/finance expenses ratio was 46.08%/8.34%/2.49%/0.65%, respectively, up -1.31/-1.00/0.31/-0.77PCT over the previous year. Net income from investment increased by 0.66 PCT to 2.45%; the share of income from changes in fair value increased by 0.48 PCT to 0.13%; the share of asset impairment losses increased by 3.55 PCT to 4.98%, mainly because Qianhai Lin did not meet expectations due to IRO inflation and geographical conditions in overseas, Europe and the US, and calculated impairment of goodwill and trademark usage rights of $104 million; and the share of non-operating income decreased by 0.15 billion yuan; the share of non-operating income decreased by 0.49 PCT to 0.14%; income tax/ Revenue increased 0.48PCT to 2.01%. (2) 23Q4 gross margin was 70.05%, up 6.97 PCT year on year; net profit margin to mother was -3.62%, up 5.80 PCT year on year. (3) 24Q1 gross profit margin was 67.26%, up 1.75PCT year on year; net profit margin to mother was 3.90%, down 3.20 PCT year on year. The decline in net interest rates is mainly due to increased sales expense ratios, asset impairment losses, and fair value change losses. The 24Q1 sales/management/R&D/finance expenses ratio was 46.80%/7.87%/2.11%/1.59%, respectively, an increase of 2.18/-0.02/0.09/0.34PCT over the previous year. In 24Q1, the share of other income decreased by 0.29 PCT to 0.72%; the share of net return on investment decreased by 0.53 PCT to 0.82%; the share of loss due to changes in fair value increased by 1.04 PCT to 0.51%; the share of asset impairment losses increased by 0.94 PCT to 1.18%; credit impairment losses decreased by 0.32 PCT to -0.36%; and income tax/income increased by 0.58 PCT to 2.37%.

Inventories have grown. At the end of 23, inventory was 945 million yuan, up 22% year on year. The number of inventory turnover days was 330 days, up 24 days year on year, and inventory/revenue was 32.4%, which was basically the same year on year. Accounts receivable were 367 million yuan, an increase of 27% year over year, and the number of accounts receivable turnover days was 41 days, a decrease of 4 days year over year. Accounts payable were $290 million, up 37% year over year, and accounts payable turnaround days was 96 days, up 13 days year over year. 24Q1 inventory/receivables/accounts payable were 888/305/197 million yuan respectively, up 28%/4%/46% year on year. The number of inventory/receivables/accounts payable turnover days was 335/40/89 days, respectively, and 48/1/21 days.

Investment advice

According to our analysis, (1) in the short term, the company continued to buck the trend and open stores during the three years of the pandemic, and domestic growth is still expected to be achieved in 24 years, but overseas business may still be under pressure; (2) in the medium to long term, SP, LAUREL, and IRO are still strong in domestic growth. They have already calculated a lot of goodwill impairment in 23 years, and the company's net interest rate still has a lot of room for repair. Maintaining the 24/25 revenue forecast of $3.00/3.466 billion yuan, adding a 26-year revenue forecast of $3.783 billion; maintaining the 24/25 net profit forecast of $257/319 million and adding a net profit forecast of $366 million for 24-26; corresponding to EPS of $0.70/0.86/0.99 for 24-26, the closing price of 7.78 yuan on April 30, 2024 corresponds to 11/9/8X for 24/25/26PE, respectively, maintaining a “buy” rating.

Risk warning

There is a risk that the fee rate remains high, the risk of opening a store that falls short of expectations. In September 2023, director Hu Yongmei was issued a warning letter by the Shenzhen Securities Regulatory Bureau due to illegal transactions, a systemic risk.