1H24 results fall short of our expectations

The company announced 1H24 results. Revenue reached HK$3.13 billion, an increase of 40.9%, and net loss to mother increased to HK$0.664 billion year over year. The performance was lower than our expectations, mainly due to increased sales expenses under the development of new channels and products. The company also paid an interim dividend of HK4.0 cents per share.

Development trends

1. Online brand building drives the growth of e-commerce and distribution channels, and KA channel operations are steady. 1) By category, 1H24 clothing cleaning and care revenue achieved HK$2.77 billion, an increase of 41.3%, mainly because the company increased its online channel promotion efforts and the growth rate of new product sales was improving; personal care/home cleaning business revenue reached HK$0.19/0.17 billion, increasing 59.6%/19%, and the company's revenue in all business lines resumed year-on-year growth; 2) By channel, the 1H24 channel achieved revenue of HK$2.27 billion, an increase of 56.9%. The company adjusted its e-commerce platform product investment strategy. Concurrent sales models such as live streaming supported rapid online growth; revenue from offline distribution channels reached HK$0.73 billion, an increase of 13.3%, mainly due to the company increasing brand promotion in emerging online channels and increasing brand power to drive multi-channel sales; KA channel revenue reached 1.32 billion HK$1.32 billion, which was basically the same as the previous year.

2. Under new channel development and brand promotion, sales expenses increased dramatically, and 1H24's performance was under pressure in the short term. Under the low level of raw materials, the company's 1H24 gross margin reached 58.7%, an increase of 3.4ppt over the previous year. On the cost side, the 1H24 sales expense ratio was 70.3%, up 22.7ppt/27.5ppt year over year respectively. Mainly because the company accelerated the expansion of e-commerce channels such as Douyin and increased the promotion of new products such as Premium Concentrated Laundry Detergent, brand and channel promotion expenses recorded a significant increase; the management fee ratio also decreased by 6.3ppt to 18.1%, mainly due to revenue growth, diluting middle and back office management expenses. Furthermore, 1H24's other comprehensive loss was HK$3.935 million, which was mainly due to an increase in foreign exchange losses compared to HK$0.013 billion in other comprehensive income of 1H23. Under the combined impact, the company achieved a net loss of HK$0.664 billion in 1H24, and the loss margin increased by HK$0.496 billion over the same period last year.

3. Follow the progress of new product promotion and cost efficiency optimization. 1) On the product side, the company continues to improve the promotion of premium concentrated laundry detergent, using cleaning effect display and multi-channel exposure. According to the company's announcement, a single live broadcast of concentrated laundry detergent sold more than 10 million bottles during the “618” period in 2024; the company also enriches the laundry detergent product matrix around the trend of functionalization and segmentation; 2) On the channel side, we believe that with live e-commerce operation experience such as Douyin and Kuaishou, and the detailed layout of the product, the subsequent online marketing efficiency is expected to gradually be optimized. Incentives promote terminal stores Goods, adjust the cooperative customer structure on the KA direct sales side to reduce the level of accounts receivable and drive sales by promoting best-selling products.

Profit forecasting and valuation

Considering the increase in cost investment due to new channel expansion and new product development, net profit returned to mother in 2024/25 was reduced by 50%/33% to HK$0.31/0.49 billion. The current stock price corresponds to 34/22 times P/E in 2024/25.

Maintaining an outperforming industry rating, the target price was lowered by 19% to HK$2.2 based on profit forecast adjustments and changes in market risk appetite, corresponding to 41/26 times P/E in 2024/25, with 21% upside.

risks

Increased industry competition; fluctuating raw material prices; poor promotion of new products; product quality problems.