Taobo released its FY24 annual report, and the performance was in line with expectations. 1) FY24 results increased 20% year over year. In the FY24 fiscal year (March 23 to February 24), the company's revenue was 28.93 billion yuan (data from the company's announcement, same below), up 6.9% year on year, and net profit to mother was 2.21 billion yuan, up 20.5% year on year. The performance was in line with expectations. Among them, FY24Q4 (December 23 to February 24) company's omni-channel retail sales increased by a low number of units over the same period last year. 2) Continuing high dividend strength. The company plans to pay a dividend of RMB 0.36 per share (including special dividends), with a dividend rate of 100.9%. Based on the latest closing price, the dividend rate is approximately 7.8%.

The multi-brand matrix developed collaboratively, the growth rate of the main brands was steady, and the brands gradually recovered during the adjustment period. 1) Most brands maintain a good growth trend.

The revenue of the main brand FY24 increased 6.5% year-on-year to 24.83 billion yuan, accounting for 86% of revenue. Revenue from other brands increased 10.5% year over year to 3.89 billion yuan, accounting for 13.5%. The growth rate of most brands represented by FY24 is higher than the company's overall revenue growth rate, and their weighted average sales growth rate is in the middle of 10%-20%. 2) Brand performance gradually improved during the adjustment period. For brands that are lower than the overall revenue growth rate, the weighted average sales volume decreased the number of units year over year, which was narrower than the decline in the number of units in the first half of the year. After removing short-term factors such as product line adjustments, the overall performance increased slightly year-on-year in the first half of the year to low year-on-year unit growth throughout the year, and also recovered.

The channel side and offline focus on improving the quality of stores, and the online omni-channel layout is more extensive. 1) By channel, retail channels are the core driver of business growth. Direct revenue for FY24 increased 8.9% to 24.70 billion yuan, accounting for 85.4%; wholesale revenue fell 3.3% year-on-year to 4.02 billion yuan, accounting for 13.9%. 2) Upgrading the store structure, focusing on improving store efficiency. At the end of the FY24 fiscal year, the company operated a total of 6144 direct-run stores, a year-on-year decrease of 421. The total number of stores decreased by 6.4% year-on-year, but the gross sales area decreased by only 0.8% year-on-year, and the single-store sales area increased 6.0% year over year. It shows that the company's channel structure is constantly being optimized, and while closing inefficient stores, it continues to develop high-quality stores. 3) Full integration of public and private domains to seize diversified channel development opportunities. The company formed a combination of online e-commerce platforms, content e-commerce, and private domain operations, and created a series of star store broadcast accounts on content e-commerce, and store broadcast sales increased by about 5 times during the year. In private domain operations, more than 80,000 enterprises and micro groups are used to communicate and service users, acquire public domain customers through video accounts, and mini-programs complete private domain transformation, and establish a closed ecological loop.

Profitability is steadily improving, and asset quality is steady. 1) Better cost control results drive increased profitability. FY24's gross margin increased by 0.1 pct to 41.8% year over year. Although brands reduced related subsidies after the pandemic, the year-on-year improvement in the company's discount rate and the increase in the share of direct business still drove the increase in gross margin. In FY24, the sales expense ratio decreased by 0.8 pct to 28.9%, and the management expense ratio decreased by 0.2 pct to 3.9%. The cost control effect was obvious, driving the operating profit margin to increase 0.6 pct to 9.6% year on year, and the net profit margin to mother increased by 0.9 pct to 7.6%. 2) Inventory turnover is healthy and efficient, and asset quality is stable. The number of inventory turnover days decreased by 13 days to 136 days year-on-year, the number of accounts receivable turnover days increased by 0.5 days to 15.1 days, and the number of accounts payable turnover days decreased by 7.2 to 15 days. It is mainly expected to be related to the Spring Festival in '24 being February (the last month of the fiscal year), which caused some amounts to have already entered the next fiscal year when they were recorded. Net cash flow from operating activities was $3.13 billion, 1.4 times net profit. Free cash flow was $2.72 billion, and year-end cash and cash equivalents of $1.96 billion, a year-on-year decrease of 17%, mainly due to dividends of $2.23 billion during the fiscal year, but cash remained abundant at the end of the period.

New brands and new cooperation models are constantly emerging, expanding retail boundaries and seizing market opportunities. 1) Reached a strategic cooperation with Fanatics to boost the sports IP market in Greater China. Fanatics is the world's leading digital platform for authorized sporting goods. It is trusted by various leagues and teams, and provides related sports products and souvenirs for major professional sports leagues and teams such as the NBA and NFL under license. In the future, the company will work with Fanatics China to maximize the operation of its franchised sports IP in Greater China using a diverse model, bringing consumers the world's most advanced tournament culture, high-quality products, and in-depth value experience. 2) The company reached a strategic cooperation with the high-end trail running brand Norda. As Norda's exclusive operating partner in China, the company will be responsible for brand promotion, promotion, global operation, etc. in the Chinese market, expand the brand portfolio, and carry out new experiments in business models and nature.

The company continues to focus on high-quality growth in global retail, improving efficiency, deepening user connections, innovating business formats and service layouts, looking forward to future development, and maintaining a “buy” rating. In the short term, considering the current trend of weak recovery in the retail market, we lowered our profit forecast for FY25-26 and added a profit forecast for FY27. The company's net profit for FY25-27 is estimated to be 23.8/26.2/2.84 billion yuan respectively (the original FY25-26 fiscal year was 27.3/3.19 billion yuan), and the corresponding PE is 10 times 12/11/10 times. Considering that the average PE of comparable companies in 24 years was 14 times, the company was given 14 times PE in 24 years, and there is still room for a 20% increase compared to the current market value, maintaining a “buy” rating.

Risk warning: Sales performance falls short of expectations; market competition increases risk; new brand cooperation falls short of expected risk.