Zhongjin Securities released a research report stating that it maintains its "outperform" rating on China Dongxiang (03818) and lowers its target price by 17% to HKD 0.38 due to the fluctuations in the company's investment business. The company's FY24 revenue increased by 4% to RMB 1.7 billion, and net loss attributable to shareholders was RMB 640 million (compared to net profit of RMB 110 million in FY23), which was lower than the bank's expectations, mainly due to the losses in its investment business (the clothing business turned from loss to profit with a profit of RMB 90 million). The company declared a special dividend of RMB 0.51 per share at the end of the period. Management plans to continue to improve the quality of single stores, close inefficient stores, and rectify and improve the core store efficiency, further optimizing the channel structure.

CICC's main points are as follows:

The improvement of offline store efficiency drove revenue growth.

In 2HFY24, the company's revenue increased by 7% YoY to RMB 970 million, of which Kappa brand revenue increased by 5% YoY to RMB 900 million. In terms of business segments, retail/wholesale revenue decreased by 5%/increased by 21% YoY, accounting for 52%/41% of the company's total revenue, respectively. During the period, the company continued to promote the efficiency of channels, strengthened operation and management, and net opened 3/7 retail/wholesale stores. The offline store efficiency in 2HFY24 increased by 20-30% on the lower side YoY. In terms of channels, offline/online revenue in 2HFY24 increased by 7%/-6% YoY, accounting for 78%/15% of the company's total revenue, respectively. Other business revenue increased by 53%, accounting for 7% of the company's total revenue.

Poor performance of the investment division dragged down the overall performance.

As of the end of March, the company held a total of RMB 7.8 billion in cash and investments, of which 49% were financial asset investments, and cash and cash equivalents accounted for 33%, further optimizing the asset structure in a volatile environment (cash and cash equivalents accounted for 26% at the end of FY23). The investment segment of 2HFY24 suffered a loss of RMB 230 million (compared to a gain of RMB 460 million in 2HFY23), of which financial asset fair value changes resulted in a loss of RMB 280 million.

Optimized discounts drove up gross margin, and inventory turnover and operating cash flow continued to improve.

In 2HFY24, the company reversed inventory impairment by RMB 20 million (compared to a reversal of RMB 10 million in 2HFY23), and the gross profit margin before the reversal was 66%, up 3.4 ppt YoY (up 3.6 ppt after the reversal), mainly benefiting from the improvement of retail discounts. The sales expense ratio in 2HFY24 was 60%, basically flat YoY; the management expense ratio increased by 3.8 ppt to 10% YoY, mainly due to employee compensation and benefits. The operating profit margin fell to -32% due to the drag of the investment segment (the clothing segment increased by 2.2 ppt to 3%). As of the end of March, the net value of inventory decreased by 15%, and the inventory turnover days decreased by 12 days to 206 days. FY24 operating cash flow increased significantly YoY by 96% to RMB 200 million.

Risk: intensified industry competition, retail environment worse than expected, reform slower than expected, investment income fluctuates.