Driven by continued store expansion and multi-brand efforts, revenue increased 22% in 2023, and net profit to mother was affected by impairment of goodwill. The company is a domestic high-end women's clothing brand group. Benefiting from its multi-brand matrix collaborative development strategy, the remarkable results of the online multi-brand and multi-platform strategy, and the efficient expansion of brands during the growth period, the company's revenue in 2023 was +21.7% year-on-year to 2.92 billion yuan, gross margin increased 4.0 percentage points to 67.8%; the total cost ratio decreased by 2.8 percentage points. Net profit attributable to mother was +416.6% year-on-year to 110 million yuan, and net interest rate increased 3.2 percentage points to 5.6%. Furthermore, due to high losses in overseas business, the estimated impairment of goodwill was about 120 million yuan. Excluding the effects of impairment of goodwill, the net profit to mother was 225 million yuan, which is in line with previous expectations. Net operating cash flow was +52.7% year-on-year to $480 million. Cash flow was abundant, and the dividend ratio reached 82.6%.

Revenue increased 12% in the first quarter of 2024, mainly due to a decline in net profit due to overseas business. Overseas demand continued to weaken in the first quarter, and overseas revenue is expected to fall by about 20%, but thanks to overall good domestic operations, overall revenue increased by 12.5% to 750 million yuan. Net profit to the mother decreased by 32.2% to 0.3 billion yuan year-on-year, and the net interest rate to the mother fell 3.2 percentage points to 3.9%. The main reason was the decrease in investment income contributed by Baiqiu due to increased losses in overseas business and a decrease in additional equity incentive expenses and government subsidies. Gross margin rose 1.7 percentage points to 67.3%. The four major expense ratios together increased 2.6 percentage points to 58.4%, mainly due to the decline in overseas business and the expansion of domestic stores, the sales expense ratio increased 2.2 percentage points.

All brands achieved growth in revenue, gross profit margin, and total number of stores throughout the year. The revenue of the main brand Golix increased 21% year over year; the three major brands performed well during the growth period, with SP, IRO China, and LAUREL increasing 50%/58%/47% year over year respectively; about 80% of the IRO brand's revenue was overseas. Although overseas business performance was greatly impacted, the overall brand still grew 10%; Ed HARDY increased 3% year over year. The number of stores bucked the trend, with a net increase of 39 from the end of 2022. In terms of gross margin by brand, each brand's gross margin increased by varying degrees; by channel, the gross margin of direct management/franchise channels was +4.7/3.2 percentage points year-on-year, respectively. It is expected that as the efficiency of new stores climbs and the benefits of brand scale will gradually be reflected during the growth period, the gross profit margin and net margin are expected to continue to increase.

Risk warning: Brand image damage; significant inventory depreciation; increased market competition.

Investment advice: Domestic business supports revenue growth, and profits are affected by overseas business in the short term. The company has bucked the trend and expanded its stores in recent years, and continues to be optimistic about the steady growth of the company's main brand and the growth potential of sub-brands during the growth period. On the profit side, net profit in 2023 fell short of expectations due to losses in overseas operations in 2023 and significant impairment of goodwill. At the same time, continued losses in overseas business in the first quarter of 2024 are expected to have a negative impact on net profit for the full year of 2024. We maintained revenue expectations and lowered our net profit forecast. We expect net profit for 2024-2026 to be 2.3/31/370 million yuan, respectively (the value before 2024-2025 was 35/41 million yuan), an increase of 118.8%/35.9%/17.8% year-on-year. Due to the reduction in profit forecasts, the target price was lowered to 8.6-9.2 yuan (originally 13.2-14.1 yuan), corresponding to 2024 PE 14-15x, maintaining the “gain” rating.