1H24 results fall short of our expectations

Shanghai Jiahua announced 1H24 results: revenue of 3.321 billion yuan, -8.5% year over year; net profit to mother 0.238 billion yuan, -20.9% year over year; net profit after deducting non-attributable net profit of 0.235 billion yuan, -10.4% year on year. On a quarterly basis, the company achieved revenue of 1.905/1.415 billion yuan in 1Q/2Q respectively, -3.8%/-14.2% year-on-year; net profit to mother of 0.256/-0.018 billion yuan, with a year-on-year difference of +11.2% /loss; 1H24's performance was slightly lower than our expectations, mainly due to adjustments in the company's internal organizational structure and brand strategy.

Development trends

1. 1H24 revenue was under pressure, and the domestic business organization structure was further adjusted. 1H24's revenue was -8.5% year-on-year. Among them, domestic and overseas business continued to be under pressure, -8.3%/-9.0% year-on-year, respectively. ① Beauty category: 1H24's revenue was 0.566 billion yuan, of which Baicaoji's 1H24 revenue increased -16% year over year, but the revenue decline was mainly due to pressure from offline department store channel sales; Yuzawa's revenue was -22%; Shuangsier's year-on-year ratio was +61%; ② Personal care category: 1H24 revenue was 1.59 billion yuan, of which Liushen's revenue was -2.8% year-on-year, and the net revenue of the US and Canada grew by about 42% year over year.

2. Gross margin improved year-on-year, and changes in fair value led to a decline in net profit margin. 1H24's gross margin was +0.9ppt to 61.1% year-on-year, mainly due to the increase in the share of sales in the beauty category with high gross margin and increased cost control efficiency to drive structural optimization of gross profit. On the cost side, the 1H24 sales expense ratio was -0.1ppt to 43.4% year on year, continuing to increase brand cost side management; the management fee ratio was -0.8ppt to 7.6% year over year, mainly due to the company's organizational restructuring and the end of the equity incentive plan, the share payment fee for the current period decreased year on year; the R&D expense ratio was -0.1ppt to 2.1% year over year, and the financial cost ratio was +0.6ppt to 0.6% year over year. Due to the adverse effects of a loss of 0.051 billion yuan due to changes in fair value, the net interest rate of 1H24 company was -1.1 ppt to 7.2% year on year, after deducting non-net interest rate -0.1 ppt to 7.1% year on year

3. Focus on brand strategy and structural adjustments to release long-term performance vitality. Looking ahead, the company announced that the domestic business organization will be further adjusted, the entire nursing and beauty division will be adjusted, and the innovation division will be established; the brand strategy will sort out brand development priorities in echelons, and focus more on core businesses with high gross profit, high growth, and high brand power. We believe the company is expected to unleash long-term vitality through architectural optimization. ① Product side: Baicaoji launched the “Zi Yuling” Extreme Wrinkle Collection in Q2 to continue to promote the high-end and rejuvenating upgrade of the brand; Yuze launched new products such as repair patches with recombinant collagen in Q2, continuing to further cultivate sensitive skin and medical art segments; and based on the popular “Mosquito Repellent Egg” and “Ice Cool Egg” products successfully created by Liushen last year, launched a new portable flower water series with anti-itch and odor relief functions. ② Channel side: The company continues to promote offline channel transformation, adhere to a diverse and differentiated layout online, strengthen e-commerce operations such as Douyin, etc., stabilize e-commerce platforms, and improve marketing efficiency. Pay attention to the results of the company's organizational structure adjustments and management improvement trends.

Profit forecasting and valuation

Due to pressure on offline channel sales and the brand is still in an adjustment period, we lowered our 24-25 net profit forecast by 15%/14% to 0.503/0.604 billion yuan. The current stock price corresponds to 24-25 20/17x P/E. Maintaining an outperforming industry rating, but due to adjustments in profit forecasts, we lowered our target price by 14% to 21.5 yuan, corresponding to 29/24x P/E in 24-25, with 43% upside compared to the current stock price.

risks

Competition in the industry has intensified, the epidemic has repeatedly affected demand, and the cultivation of new products has fallen short of expectations.