Incident: The company released 24H1 results, achieving revenue of 3.431 billion yuan, a year-on-year increase of 14.2%, net profit of 0.229 billion yuan, a year-on-year increase of 10%, a net interest rate of 6.69%, a year-on-year decrease of 0.25pct, gross profit margin 24.15%, and a year-on-year decrease of 2.75pct. 24Q1/24Q2 revenue was 1.796/1.635 billion yuan, up 17.87%/10.33%; net profit attributable to mother was 0.131/0.099 billion yuan, up 5.47%/16.76%. After deducting non-return net profit of 0.129/0.097 billion yuan, the same increase was 5.37%/16.96%. 24H1 plans to pay a dividend of 0.1 yuan per share (tax included), with a total cash dividend of 0.089 billion yuan, accounting for 39% of 24H1's net profit to mother. This is another mid-term dividend for the company after 2017.

Comment:

Performance growth mainly comes from franchise channels. The 24H1 self-operated/franchise channel achieved revenue of 1.725/1.647 billion yuan, respectively, of -3.98%/+43.66% year over year, gross margin of 31.09%/17.19%, respectively, and -0.71 ptc/-2.72 ptc year on year. Looking at the breakdown: Total online revenue was 0.6 billion yuan, down 8%. Among them, jewelry/leather goods decreased by 4% and 30% respectively, and the online gross profit margin was 22.70%, down 1.74 pct from the previous year. We expect the share of online jewelry revenue to increase. In terms of offline channels, jewelry's offline revenue was 2.616 billion yuan, an increase of 17%; leather goods offline revenue was 0.084 billion yuan, a decrease of 24%.

By product, leather goods continued to be under pressure, and gold products performed well. By industry, revenue from the jewelry sector was 3.278 billion yuan, up 17.43%; gross profit margin was 22.35%, -1.87pct; revenue from the leather goods sector was 0.15 billion yuan, down 26%; gross margin was 62.11%, -2.34pct year on year. By product, the jewelry industry is divided into fashion jewelry and traditional gold. Among them, the revenue of fashion jewelry/traditional gold was 1.654/1.477 billion yuan, +5.97%/+31.37% year-on-year, with a gross profit margin of 28.52%/9.78%, and -3.44/+0.77pct year-on-year. Revenue from brand licensing and service fees was $0.123 billion, up 41% from the same period.

The 24H1 jewelry store continued at a fast pace and was faster than the company's original plan. The company has a total number of 1,751 stores and a net opening of 38 stores in 24H1. The total number of jewelry stores in the company is 1,451. The number of “CHJ Chaohongji” jewelry stores is 1,439, including 1,186 franchised stores, 265 self-operated stores, and 76 net stores in the first half of the year, faster than the company's original plan. The company aims to reach 2,000 stores by 2025. By the end of the 24H1 period, the total number of leather goods stores was 300.

In terms of profitability, the 24H1 period cost ratio was 14.64%, year-on-year -2.65pct, of which the sales/management/R&D/finance expenses ratio was 11.36%/1.92%/0.85%/0.51%, -2.73/+0.32/-0.19/-0.05pct year over year. We believe that the overall decline in the cost ratio is related to the increase in the share of franchise revenue. Among them, the slight increase in the management expense ratio is due to the increase in depreciation and amortization expenses of the headquarters building.

Profit forecast: Overall, 24H1 achieved double-digit revenue and excellent profit growth performance in an environment where leather goods continued to be pressured and jewellery prices fluctuated. Mainly, the jewelry franchise channel continued to perform well. We expect revenue of 6.8/8/9.3 billion yuan for 24-26, an increase of 16%/16%/16%, and net profit to mother of 0.382/0.435/0.484 billion yuan, an increase of 15%/14%/11%, corresponding to the closing price PE10/9/8X on August 28.

Risk factors: Leather goods profits fall short of expectations & risk of impairment; sharp fluctuations in gold prices; store expansion falls short of expectations; weak consumer demand.