Description of the event
The company released its 2024 quarterly report. 2024Q1 achieved operating income of 1,905 billion yuan, a year-on-year decrease of 3.76%, and realized net profit to mother of 256 million yuan, an increase of 11.18% over the previous year, and realized deducted non-net profit of 293 million yuan, an increase of 29.17% over the previous year.
Incident comments
The sales revenue of the personal care category was relatively high in the first quarter, and the average sales price of the core skincare and personal care categories showed a year-on-year upward trend. Looking at the revenue category for the first quarter of this year, the company's skincare categories were classified according to the new structure: the skincare category included Baicaoji, Yuze, Diancui, Golf, and Shuangmei, which achieved revenue of 340 million yuan in a single quarter; the personal care category included Liujin, Megajing, Jia'an, etc., which achieved revenue of 1.11 billion yuan. The maternal and child categories include Qichu and Tang Meixing brands, which achieved operating revenue of 370 million yuan; while partner brands include Pien Tsai, Betis, and Fangxin, etc., achieved revenue of 61.06 million yuan in a single quarter. From an average price perspective, in the first quarter of this year, according to a comparable scale going back to 2023, the average sales price of the 2024Q1 skincare category increased 8.27% year on year, the personal care category increased 6.9% year on year, and the maternal and child category narrowed 0.67% year over year. Overall, the company's core skincare and personal care categories all achieved a year-on-year increase in average sales prices in the first quarter of this year.
The focus on business structure brings about margin optimization, and the effects of organizational change drive rate improvements. 2024Q1's gross margin in a single quarter increased by 2 percentage points year on year. We expect the main reasons: 1) Optimization of procurement costs for some raw materials. In the first quarter of 2024, the average purchase price of soap oil fell 7.9% year on year, the average purchase price of surfactants and emulsifiers fell 0.59% year on year, the average purchase price of nutritional drug additives fell 6.9% year on year, and the purchase price of cartons fell 1.4% compared to the same period in 2023; 2) The company focused on products and businesses with higher unit prices and high gross margin from the first quarter. Achieving improvements can also be confirmed from the side. Looking at the two expenses combined, the sales+management expense ratio narrowed by about 6 percentage points year over year. We expect that the optimization of the two cost rates is inseparable from the improvement of internal collaboration efficiency driven by the strategic transformation of the division. On the other hand, it is expected to result from the normalization of the company's marketing investment rhythm this year. Some of the marketing expenses accompanied the arrival of the peak sales season in the second quarter and are expected to be reflected in the second quarter. The above significant increase in operating profitability was partially offset by phased losses due to rising financial expenses and changes in fair value. Combined, non-net profit deducted in the first quarter increased by 29%, and the company ushered in a significant improvement in quarterly profitability.
Investment advice: We believe that the company's multi-brand, multi-category, and multi-price band group structure still has some growth resilience at this point. At the same time, the company implemented organizational structure adjustments in the division system in 2023, which is expected to speed up the company's decision-making speed and improve the efficiency of strategy implementation. The current improvement in operating efficiency has already been initially reflected in profit improvements in the first quarter of this year. As cosmetics are launched in the second quarter and the sales season is high, marginal optimization on the revenue side is also worth looking forward to. The company's EPS is expected to be 0.85, 0.96, and 1.12 yuan respectively in 2024-2026, maintaining a “buy” rating.
Risk warning
1. Strategy implementation falls short of expectations;
2. Industry competition intensifies.