Main brand turnover grew steadily, discounts improved month-on-month, and channel inventory returned to pre-pandemic health levels. Retail sales of the main brands in 24Q2 increased 10% year-on-year (23Q2: high double digits, 24Q1: high number of units), and retail discounts were about 75% off (23Q 2:75 off, 24Q 1:7-75 off). The growth rate of retail sales and the level of discounts both improved compared to Q1. The retail turnover of the main 24H1 brand increased in units (23H1: high double digits), and channel inventory turnover was about four months (23H1: less than five months). Channel inventory levels have returned to healthy levels in the same period before the pandemic.
The controlling shareholder plans to acquire a fashion sports brand that continues to lose money to improve profitability and cash flow. The retail business of Gestway and Palatin brands continued to record losses due to macro-environmental factors. Since they were acquired by the company in 2019 for 0.26 billion US dollars, the two brands have accumulated operating losses of more than 100 million US dollars. The Ding Family, the controlling shareholder of the company, plans to acquire KP Global, which owns the Gashway and Palatine brands, for $0.151 billion. The company's resources will focus on running, thereby strengthening the synergy of high-profit brands and continuously improving profit levels.
Judging that the divestiture of the brand will have less impact on revenue growth, it is expected to reduce operating losses by 0.14 billion yuan in 24. In 2023, the fashion sports division of Gashway and Palatin brands earned 1.6 billion yuan, an increase of 14.3% over the previous year.
The company's main growth engine, the Professional Sports Division's revenue was 0.8 billion yuan, an increase of 98.9% over the previous year. Professional sports sub-brand Sauconi launched new products such as “ENDORPHIN SPEED Coffee Speed 4” and “FOR HER” this year, judging that professional sports will maintain high growth, and the company's revenue growth rate will be less affected by the sales incident.
In 2023, the fashion sports division lost about 0.18 billion yuan, accounting for -11.6% of the company's operating profit. The company expects the loss amount in 2024 to be similar to the loss in 2023, and the losses of the two brands will no longer be incorporated into the company's statements after the sale is completed. Assuming that the divestment is completed in 24Q2, it is expected to reduce the company's operating loss by about 0.14 billion yuan in 2024.
A special dividend is proposed for sale proceeds, and the dividend ratio is expected to reach 14.6%. The company intends to pay $0.151 billion of sales revenue as a special dividend. Assuming that the dividend rate is maintained at 50% in 2023 and the divestment of KPGlobal is completed in 24Q2, the dividend rate is estimated to reach 14.6% in 2024 (1 US dollar = 7.81 HKD, 1 HKD = 0.93 yuan, calculated at the closing price and exchange rate on July 22).
Profit forecasting and valuation. We believe that with further control of the fee rate and the restoration of e-commerce growth, the company's profit level is expected to rise further in 2024. Combined inventory and cash flow management have achieved remarkable results, and the company will respond effectively and flexibly to changes in the retail environment through solid and stable back-office capabilities. We expect net profit of 2024-2026 of 1.155, 1.277, and 1.408 billion yuan, giving the 2024 PE valuation range 11-13X, corresponding to a reasonable value range of HK$5.16-6.10 based on the exchange rate of HK$1 = RMB 0.93 (July 22 exchange rate), maintaining the “superior to the market” rating.
Risk warning. The epidemic was repeated, store efficiency and online growth fell short of expectations, the retail environment was weak, and the company's new products fell short of expectations.