Revenue increased 7.3% in the first half of the year, and gross margin declined slightly due to channel reforms and product portfolios, maintaining high dividends. The company is a domestic high-end business casual menswear brand. Revenue for the first half of 2024 was +7.3% YoY to 1.6 billion yuan, and net profit to mother +3.6% YoY to 0.28 billion yuan. Among them, revenue from the main series increased 4.5% year on year to 1.21 billion yuan. The light business series benefited from new retail sales driven by Ole channels, which increased 17.3% year over year to 0.39 billion yuan; online store retail sales increased by +37.0% year over year. Gross margin fell 1.8 percentage points to 50.0% year over year, mainly affected by the company's termination of cooperation with distributors in Heilongjiang, related repurchase compensation paid by switching to the DTC model, and the reduction in average unit price due to changes in the product portfolio.

It is proposed to pay an interim dividend of HK13 cents per share and a special dividend of HK$5 per share, with a payout ratio of 72%.

Channel transformation continues to advance, and inventory optimization results are showing. 1) The main series introduced a direct management model to promote the transformation of DTC's consumer-facing model. It was first implemented in the Heilongjiang region in the first half of this year. As of June 2024, the total number of stores was 2,709, an increase of 14 over the previous year, including 10 direct-run stores to 307, 23 to 959, and a decrease of 19 to 1,443 distribution stores. 2) Inventory optimization achieved remarkable results. The number of inventory turnover days in the first half of the year was 189 days, a decrease of 22 days over the previous year. During the DTC transformation process, most of the inventory purchased from distributors in Heilongjiang in the first half of the year was sold, and inventory was cleared through outlet stores and e-commerce platforms. The new logistics park's intelligent system quickly brought inventory products to the market and accelerated inventory turnover. 3) In August of this year, a joint venture with Descente was established. China's Lilang invested 0.15 billion yuan and held 54% of the shares. Wanxingwei China will operate and engage in the design, sales and distribution business of Munsingwear (Wanxingwear) brand products in China, and is expected to officially launch the products in 2025.

Management lowered the annual retail growth target to 10%, and the second half of the year is expected to perform better than the first half. Due to the impact of the overall clothing retail environment, the 2024 retail growth target was lowered from 15% to 10%. The second half of the year is expected to perform better than the first half of the year, giving full play to the advantages of autumn and winter products, and aiming to grow the new retail business by 30% or more throughout the year. In terms of the number of stores, the company aims to net open 50-100 stores and complete the seventh-generation renovation project for 400 stores to enhance the brand image.

Risk warning: brand image damage; channel reforms falling short of expectations; systemic risks.

Investment advice: The company operates steadily and has high dividends, and new retail and light businesses still have great potential for growth in the future.

Although the consumer environment was weak in the first half of the year, the company still achieved positive revenue growth. Profit margins declined slightly, mainly due to channel reforms and product portfolio changes, while the company maintained a steady and high level of dividends over a long period of time. Affected by the decline in consumption power this year, we slightly lowered our profit forecast. Net profit is expected to be 0.57/0.65/0.73 billion yuan from 2024 to 2026, respectively (previous value was 0.59/0.68/0.75 billion yuan). Based on the profit forecast reduction, the target price was slightly lowered to HK$4.6-5.2 (previous value was HK$5.2-5.5), corresponding to 9-10xPE in 2024, maintaining the “superior to market” rating.