FY24 (April 2023 to March 2024) performance fell short of our expectations for the company's FY24 revenue to increase 4% to 1.7 billion yuan, and the net profit loss to mother of 0.64 billion yuan (FY23 profit 0.11 billion yuan) was lower than our expectations, mainly due to losses in the investment business (clothing business reversing losses to profit of 0.09 billion yuan). The company declared a final special dividend of RMB 0.51 cents/share.

Significant improvements in offline store efficiency have led to revenue growth. 2HFY24's revenue increased 7% year over year to 0.97 billion yuan, with Kappa brand revenue also increasing 5% to 0.9 billion yuan. By business, retail/wholesale revenue was -5%/+21%, respectively, accounting for 52%/41% of the company's total revenue. During the period, the company continued to improve channel efficiency, strengthen operation management, and opened 3/7 retail/wholesale businesses respectively. FY24 offline store efficiency increased 20-30% year over year. By channel, 2HFY24 offline/online revenue was +7%/-6%, respectively, accounting for 78%/15% of the company's total revenue. Revenue from other businesses increased 53% year over year, accounting for 7% of the company's total revenue.

Investment segment losses dragged down performance. As of the end of March, the company held a total of 7.8 billion yuan in cash and investments, of which 49% was invested in financial assets, accounting for 33% of cash and equivalents. The asset structure was further optimized in a volatile environment (cash and equivalents accounted for 26% at the end of FY23). The 2HFY24 investment segment lost 0.23 billion yuan (vs. 2HFY23 income 0.46 billion yuan), of which 0.28 billion yuan was lost due to changes in the fair value of financial assets.

Discount optimization led to an increase in gross margin, and inventory turnover and operating cash flow continued to improve. 2HFY24's inventory impairment refunded 0.02 billion yuan (2HFY23 refunded 0.01 billion yuan), and the gross profit margin before inventory impairment was deducted by 66%, an increase of 3.4 ppt over the previous year (same increase of 3.6 ppt after the refund), mainly benefiting from the improvement in retail discounts. The 2HFY24 sales expense ratio was 60%, which was basically the same as the previous year; the management expense ratio increased by 3.8ppt to 10%, mainly due to the increase in employee compensation and welfare expenses. Operating margin declined to -32%, driven by the investment segment (apparel segment increased by 2.2ppt to 3%). By the end of March, the net inventory value had decreased by 15%, and the number of inventory turnover days had also decreased by 12 to 206 days. FY24's operating cash flow increased 96% year over year to 0.2 billion yuan.

Development trends

The management plans to continue to improve the quality of individual stores, close inefficient stores, rectify and improve the efficiency of core stores, and further optimize the channel structure.

Profit forecasting and valuation

Considering the impact of fluctuations in the company's investment business, the FY25/26 EPS forecast was lowered from 0.05/0.05 yuan to -0.04/0.02 yuan. The current stock price corresponds to 17 times the FY26 price-earnings ratio, maintaining the outperforming industry rating. Considering the continued improvement of the company's apparel business, maintaining a price-earnings ratio of 6 times the FY25 price-earnings ratio of the company's apparel business, and taking into account the investment business value after the valuation discount, we lowered the target price of 17% to HK$0.38 based on the segment plus total valuation price, with 22% room for growth.

risks

Competition in the industry intensified, the terminal retail environment fell short of expectations, reforms fell short of expectations, and investment returns fluctuated.