Incident Overview

2024H1's revenue/net profit/net operating cash flow was 1.6/0.28/0.22 billion yuan respectively, up 7.3%/3.6%/-63.3% year over year. The revenue growth rate was better than the industry average mainly driven by light commerce and e-commerce, but the net profit growth rate was lower than revenue mainly due to a decline in gross margin. The lower operating cash flow than net profit was mainly due to a decrease in trade accounts payable and other accounts payable balances.

The company paid an interim dividend of HK$0.13 per share and a special interim dividend of HK$0.05, with a dividend ratio of 8.8%.

The company signed an agreement with Descent Co., Ltd. and its subsidiary Shanghai Descente Commercial Co., Ltd. through its subsidiary to establish a joint venture, Wanxingwei China. China 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 brand products in China. The company expects to officially launch Munsingwear brand products in 2025.

Analytical judgment:

Light commerce and e-commerce led to high revenue unit growth, with a net opening of 14 stores in the first half of the year. (1) On a quarterly basis, retail sales of 2024Q1 LILANZ products increased by a high number of units year-on-year, while the number of units in Q2 year-on-year growth slowed. (2) By brand, the revenue of the main brand/light business series increased by 4.5%/17.3%, and the current share of light commerce has increased to 24%. The slowdown in the growth rate of the main series is mainly due to the decline in distribution sales sales due to the adjustment of the DTC model in Heilongjiang Province, and the repurchase of inventory from the original distributor required deduction of sales revenue and compensation paid to distributors due to termination of cooperation, but e-commerce and Olay contributed to the increase. (3) By channel, new online retail has increased by 37%. In recent years, offline companies have carried out a series of actions such as wholesale to consignment sales and direct sales. The 2024H1 company had a total of 2,709 stores (2412/297 main brand/light business series, 959/1443/307 distributors/self-operated stores, and 885/81 shopping malls/outlet stores), with a net opening of 14 in the first half of the year, with a net increase of 19/ -5 in the first half of the year, and a net increase of 23/-19/10 for shopping malls/distributors/self-operated stores, respectively; the net year-on-year increase of 63 stores (main) Brand/light commerce net increase of 18/45), up 2.4% year on year (the number of main brand/light business stores increased 0.75%/17.86% year over year, that is, light business mainly contributed from opening stores); the total store area was about 0.4424 million square meters, an increase of 3% year on year. (4) By region, North China, Northwest China, and East China had higher growth: North China/Northeast China/South China/Southwest/Southwest/Northwest China revenue increased by 11.4%/-53.7%/13.2%/5.3%/-3.7%/15.0%, respectively. Sales in the Northwest China region increased 15% year-on-year due to better outlet sales. The increase in North China was mainly due to the increase in the number of stores. The decline in e-commerce sales in the East China region was mainly due to the end of sales cooperation with distributors in Heilongjiang. Regional sales The decline was mainly due to the brief impact of the change of distributors in Chongqing. (5) By category, sales in the tops/pants category increased 11.8%/12.7% year on year, accounting for 60.1%/25.2%. Among them, the year-on-year increase in the top category mainly benefited from the increase in sales in the down jacket category.

The end of cooperation with distributors led to a decline in gross margin. The decline in OPM was lower than gross margin mainly due to an increase in other revenue, and the decline in net interest rate lower than OPM was mainly due to an increase in the share of financing revenue. The gross margin of 2024H1 was 50%, a year-on-year decrease of 1.8 PCT, mainly due to the termination of cooperation with distributors and a decrease in the average unit price due to changes in the product portfolio. 2024H1 OPM was 19.6%, down 0.9 PCT year over year. 2024H1 net profit margin was 17.5%, down 0.6 PCT year over year. The decline in OPM was lower than gross margin mainly due to an increase in other revenue. 2024H1's other revenue was 0.066 billion yuan, an increase of 1135% year over year, mainly due to increased government subsidies. The decline in net interest rate was lower than OPM mainly due to a 0.2 PCT increase in the share of interest income over the same period last year. Sales and distribution expense ratio/administrative expense ratio/other operating expense ratios were 29.1%/5.0%/0.4%, respectively, up 2.4/0.1/0.4PCT. Among them, the increase in sales and distribution expenses was mainly due to increased advertising expenses and direct-run store expenses. Among them, advertising expenses and decoration expenses were 0.213 billion yuan, accounting for 13.3% of total revenue, a year-on-year decrease of 0.3 PCT. Direct store expenses were 0.158 billion yuan, accounting for 8.7% of total revenue, up 1 PCT year on year. Other increases in operating expenses were mainly due to increased charitable donations. Interest income/expenses/lease liabilities interest/exchange gain/loss increased 0.2/0.1/0.0/-0.1 PCT year-on-year.

The number of inventory turnover days was reduced, and an inventory provision of 0.042 billion yuan was made. 24H1's inventory was 0.831 billion yuan, up 0.66% year on year. The number of inventory turnover days was 189 days, a decrease of 22 days year on year. During the reporting period, provisions of 0.042 billion yuan were made in accordance with the company's inventory provision policy, and the provision amount decreased by 24.7% over the same period last year. Accounts receivable were $0.777 billion, up 6.05% year on year, and the number of accounts receivable turnover days was 39 days, down 12 days year on year, mainly due to increased recovery of long-outstanding receivables and an increase in sales as a share of retail sales during the year. The company's accounts payable was $0.884 billion, a year-on-year decrease of 12.4%. The number of payable turnover days was 162 days, an increase of 22 days over the previous year, mainly due to the increase in the use of trade notes to be repaid at a later stage.

Investment advice

According to our analysis, (1) In the short term, offline stores are expected to increase by a net of 50-100 stores in 24 years, and the opening speed is slightly lower than the 100-200 store opening speed. The new stores will be mainly shopping malls and outlet stores. In addition, the company plans to complete the seventh-generation renovation project for 400 stores within 2024, and the revenue growth rate is expected to drop from 15% to 10%; online, the company plans to increase the new retail business by more than 30% year-on-year in 24. (2) In the medium term, the company's light business series, e-commerce channels, and overseas travel are still growing. The company plans to open its first store in Malaysia. (3) In the long run, I am optimistic that the company plans to establish a joint venture Wanxingwei (China) to enter the second growth curve brought by the golf apparel circuit. Although the current capacity of the golf course is still small (according to data from the Huajing Industry Research Institute, China's golf products market reached 3.626 billion yuan in 2023, including the golf apparel market 1.399 billion yuan), it has sports and outdoor attributes, which is conducive to attracting incremental customers; and according to the interface website data, Wanxingwei currently has only 23 stores and revenue of 69 million yuan in fiscal year 23 There is plenty of room to open stores and improve store efficiency in the future. Considering that the company lowered its 24-year store opening guidelines, lowered its 24-26 revenue by 4.08/4.62/5.2 billion yuan to 3.89/4.28/4.84 billion yuan, and lowered 24-26 net profit to mother of 0.61/0.7/0.8 billion yuan to 0.56/0.6/0.67 billion yuan, corresponding to a 24-26 EPS reduction of 0.51/0.59/0.67 yuan to 0.47/0.50/0.56 yuan, The closing price of HK$4.09 on August 13, 2024 was 8/7/7 times PE for 24/25/26 (1 HKD = RMB 0.92), maintaining a “buy” rating.

Risk warning

High risk of terminal inventory; brand aging being diverted from fashion and leisure; store closure due to declining profits of franchisees; systemic risk.