Key points of investment:

The company released its 2023 annual report and 2024 quarterly report. Domestic performance exceeded expectations, and overseas losses put pressure on overall performance. 1) Revenue reached a record high in '23, and profit performance was in line with expectations. In 2023, the company achieved revenue of 2,915 billion yuan, a year-on-year increase of 21.7%, and an increase of 23.4% over 2021, reaching another record high. Net profit to mother was 106 million yuan, up 417% year over year. In line with the performance report data, the performance was in line with expectations. If the impact of goodwill trademark impairment is not taken into account, net profit is about 225 million yuan, an increase of 10 times over the previous year. 2) Domestic revenue continued to grow at a high rate in 24Q1, and overseas revenue is still recovering. 24Q1 revenue was 750 million yuan, up 12.5% year on year, and net profit to mother was 29 million yuan, down 38% year on year. Profit performance was slightly lower than expected, mainly due to increased losses in overseas operations. Meanwhile, domestic business continued to perform well. Revenue increased by about 20% year on year, and net operating profit increased compared to the same period last year. The company increased shareholder returns in '23, and the annual dividend rate rose to 83%.

By brand, multiple brands have continued to grow rapidly, and gross margins have improved markedly. 1) Main brand revenue increased by more than 20%. Revenue recovered to 1.07 billion yuan in '23, up 21% year on year, gross margin increased 4.3 pct to 71.3% year on year, and the net number of stores increased by 4 to 301 at the end of '22. Direct stores and franchise stores were 198/103, respectively. 24Q1 revenue increased 29% year over year to $310 million. 2) Laurel is growing strongly. Laurel's revenue increased 47% to 350 million yuan in '23, gross margin increased 2.8 pct to 74.4% year on year, and the number of stores increased by 9 to 87 net from the end of '22, with 74/13 direct-run stores and franchised stores respectively. 24Q1 revenue increased 40% year over year to 94.79 million yuan. 3) Ed Hardy's gross margin improved markedly. Ed Hardy's brand revenue increased 3% to 310 million yuan in '23, gross margin increased 9.2pct to 55.8% year over year, and the number of stores decreased by 6 to 95 net compared to the end of '22. 24Q1 revenue fell 14% year over year to 69 million yuan. 4) The IRO brand has experienced high domestic growth, and there have been short-term fluctuations overseas. IRO brand revenue increased 10.5% to 730 million yuan in '23. Among them, domestic business continued to be strong, revenue increased 58% in '23, and growth slowed due to a decline in overseas business. The gross margin increased by 2.2 pct to 60.9% year-on-year, and the number of stores increased by a net of 15 to 112 from the end of '22, and the number of direct-run stores and franchised stores was 110/2, respectively. 24Q1 revenue fell 8% year over year to 160 million yuan, but domestic growth was still 21%. 5) Self-portrait23's annual revenue exceeded 400 million. Self-portrait revenue increased 50% to $420 million in '23. Gross margin increased 0.3 pct to 82.8% year over year, and the net number of stores increased by 17 to 57 compared to the end of '22. 24Q1 revenue increased 12% to $120 million.

Looking at each channel, offline direct management is superior to joining, and online multi-platform development. Online revenue increased 12.0% year over year in '23. The ELLASSAY brand continued to grow rapidly on the Tmall platform and Douyin platform. It continued to perform well on the Vipshop platform, and the GMV of all platforms exceeded 700 million yuan. The Laurel brand worked together on Tmall and the Vipshop platform, and online sales increased 63% year over year.

The self-portrait brand's online GMV exceeds 300 million yuan. In offline channels, direct revenue increased 24% year on year to 2.4 billion yuan, gross margin increased 4.7pct year on year to 71.7% year on year, 24Q1 revenue increased 25%, franchise revenue increased 12% year on year to 480 million yuan, and gross margin increased 3.2 pct year on year to 55.9% year on year. 24Q1 revenue fell 27%.

Profitability has increased steadily, and cash flow has improved markedly. In '23, the company's gross margin increased by 4 pct to 68%, the sales expense ratio decreased by 1.3 pct to 46% year on year, the management expenses ratio (including R&D) decreased by 0.7 pct to 11% year on year, and net profit margin increased 2.8 pct to 4% year on year. The 24Q1 company's gross profit margin was 67%, up 1.7 pct year on year, and the sales expense ratio increased 2.2 pct to 47% year over year. It is expected to be mainly affected by the decline in overseas revenue but more rigid expenses such as rent and personnel, while the sales expense ratio for domestic business is continuously controlled. The 24Q1 management expense ratio (including R&D) is 10%, and the net profit margin to mother is 4%. If the impact of overseas business losses is excluded, the net profit margin performance of the domestic business is better. At the end of 23, the company's inventory was 945 million yuan, an increase of 22% over the previous year. Benefiting from continued revenue growth in 23 years, net cash flow from operating activities was $480 million, up 53% year on year, and cash and equivalent was 550 million yuan, up 33% year on year.

The company's strategic goal is to “become an internationally competitive high-end fashion brand group”. The main brand continues to grow steadily, and the acquisition of brands shows development potential. However, considering that the current environment in the European market is still unstable, it still has an impact on the sales of the company's IRO brand and may slow down the company's overall performance. We lowered the company's profit forecast for 24-25 and added a 26-year profit forecast. The estimated net profit for 24-26 will be 2.2/3.2/370 million yuan (previously 24-25 million yuan), respectively, and the corresponding PE is 13/9/8 times. Referring to the average PE of comparable companies in 24 years, the company was given 16 times PE in 24 years, with a target market value of 3.52 billion yuan. Compared with the current market value, there is still room for 23% increase, and the “buy” rating is maintained.

Risk warning: Risk of sales recovery falling short of expectations, risk of increased inventory, increased risk of industry competition.