Description of the event

In 2024Q1, the company achieved revenue, net profit attributable to mother, and net profit of 31.4, 350, and 340 million yuan, with year-on-year changes of 4.6%, 11.4%, and 15.6%. Revenue was in line with expectations, and performance was better than previously expected (5% to 10%).

Incident comments

Revenue recovered steadily, and the performance was superior to retail, driven by franchise shipments. On the revenue side, the company's retail sales gradually picked up in Q1. Since March, retail performance has been superior to that of peers. In addition, channel inventory replenishment drives franchise delivery better than terminal retail, which in turn drives revenue performance superior to retail turnover.

Under controlled discounts, gross margin increased, and the cost ratio combined with asset impairment losses dragged down net interest rates. Gross profit margin: Q1 gross margin was +2.3 pct to 46.6% year over year, reaching the best level in recent years. It is expected that due mainly to the promotion of global integration, terminal discounts have been tightened and the share of high-margin children's clothing will increase. Expense ratio: The Q1 company's expense ratio was +0.15 pct to 28.3% year over year. Among them, sales/management/R&D/finance expenses rates were +1.07pct/+0.1pct/+0.12pct to 24.5%/1.5%/-2.1% year over year, respectively. The increase in management and marketing expenses is expected to be mainly due to an increase in revenue performance, and the decrease in financial expenses is expected to mainly result in interest income of +40 billion yuan year-on-year due to increased interest on time deposits. Operational quality: Driven by the company's implementation of global new retail sales and removal of old products, etc., the company's inventory at the end of Q1 continued to be reduced from -23.3% to 2.59 billion yuan, and the absolute value fell to a low level in recent years. However, due to increased preparation for falling inventory prices in the current period, asset impairment losses were +33.86 million yuan year-on-year. In summary, although the increase in sales expenses ratio and asset impairment losses had a certain impact on net interest rates, the company's net interest rate was +0.65pct to 11% year-on-year, driven by a strong increase in gross margin, with excellent performance.

Looking forward to the future, the company consolidated its foundation, and achieved results in globalization, discount control, and inventory reduction. Along with channel inventory removal and quality optimization, it is expected that franchisees' performance will resume steady growth after net store opening when they resume picking up goods in 2024. The company is expected to return to 2024-2026 at 12.2 billion yuan, 13.5 billion yuan, and 1.54 billion yuan, corresponding to PE of 14, 13, and 11X, maintaining a “buy” rating.

Risk warning

1. Fluctuations in the retail environment;

2. Inventory removal falls short of expectations;

3. The cost investment conversion effect is weak.