Introduction to this report:

Q2 Performance is in line with expectations, profitability remains excellent. Buck the trend and expand stores and wait for consumption to pick up. High dividends are worth paying attention to investment points:

Investment advice: Considering the weak consumption environment since 2024, offline traffic is under pressure, and online competition is fierce, we lowered the company's 2024-26 EPS forecast to 0.69/0.74/0.79 yuan (0.76/0.84/0.90 yuan before adjustment). Considering that the company is the leading textile manufacturer in China, leading the industry in profitability, it gave 2024 a PE 15 times higher than the industry average, lowered the target price to 10.29 yuan (12.91 yuan before adjustment), and maintained the “gain” rating.

Q2 Performance was in line with expectations, and profitability remained excellent. H1's revenue was 1.31 billion yuan, up 2.8% year on year; net profit to mother was 0.218 billion yuan, down 0.6% year on year; net profit deducted was 0.193 billion, down 0.47% year on year; gross profit margin was 55.0%, up 0.8 pct year on year; period expense ratio was 35.8%, up 1.6 pct year on year, mainly due to sales expenses of 28.8%, up 1.8 pct year on year. Among them, advertising expenses increased 32% year on year, and container display and decoration costs increased 72% year on year. Q2 revenue was 0.66 billion, up 0.5% year on year; net profit due to mother was 0.096 billion, down 11.7% year on year, and 0.088 billion without return, down 3.7% year on year.

Franchise performance is superior to direct management, and online profits have improved significantly. H1 online/direct/franchise revenue was 0.53/0.31/0.33 billion yuan, respectively, -0.6%/-0.9%/+1.95% year-on-year, respectively. ① Offline: 498 direct-run stores, up 25/14 month-on-month respectively. The number of units in store efficiency is declining year-on-year. We expect it to be mainly affected by customer flow. There were 1,033 franchise stores, up 42/23 month-on-month respectively. Single store delivery revenue remained flat year over year, and franchisees were operated in a flat structure to achieve management output. H1 added 60 new stores and 38 new image stores, and the image upgrade increased the brand's premium space. ② Online: Competition in the industry intensified. The company adopted a hierarchical product management system to manage product demand on various platforms in an integrated manner to avoid internal price consumption. Instead of simply targeting GMV growth, profit was the core consideration. The gross profit margin was 46.5%, an increase of 2 pcts over the previous year, and the performance was impressive.

Buck the trend and expand stores and wait for consumption to pick up. The high dividends are worth paying attention to. H2 is still under pressure on domestic consumption. H1 companies have bucked the trend and occupied an advantageous position at a low cost. We believe that currently e-commerce competition is fierce, and the company's online revenue accounts for 40%, and subsequent growth is limited. Opening offline stores against the trend is expected to take the lead in recovering and enjoy greater flexibility in the subsequent recovery in consumption. Furthermore, the company has maintained a dividend ratio of over 90% since 2021, and is expected to continue to have a high dividend ratio in 2024. The current dividend rate is above 8%.

Risk warning: Terminal consumption recovery falls short of expectations, industry competition intensifies