Incident Overview

2024H1 Company's revenue/net profit attributable to mothers/net profit after deduction of non-attributable net profit/operating cash flow were 10.81/0.044/0.022/ -0.106 billion yuan, up -1.33%/-5.77%/-39.91%/-1076.15% year-on-year. The decline in net profit after deducting non-net profit was higher than revenue, mainly due to reduced net income from other income and investments, increased sales expenses, and increased asset impairment losses. Non-current assets are mainly profits and losses on disposal of illiquid assets (24H1/23H1 is 0.02/-0.002 billion yuan, 24H is income from sale of real estate in printing and dyeing workshops) and government subsidies (24H1/23H1 is 0.008/0.02 billion yuan). The negative operating cash flow was mainly due to reduced accounts payable, loss of investment, and loss of disposal assets. 24Q2 revenue per quarter, net profit attributable to mother, net profit after deduction of non-return to mother was 4.31/0.03/-0.008/0.001 billion yuan respectively, up -2.2%/-80.7%/loss/correction year-on-year.

2024H1 plans to pay a cash dividend of 0.1 yuan for every 10 shares, with a dividend rate of 51.84% and an annualized dividend rate of 0.1%.

According to the company's strategic development plan, in order to further optimize the asset structure and revitalize existing assets, the company plans to sell assets related to the company's logistics distribution center to Golden Port Qidi, and the transaction price is set at 0.556 billion yuan. On July 4, the company announced that Honghong Apparel, the controlling shareholder of the company, plans to increase its holdings by 50-80 million yuan within 6 months through a bulk trading platform with its own capital. On August 12, the company announced the change of chairman. Mr. Zhou Hongjiang, the former vice chairman, is the chairman of the company, which is expected to lead the company from regional advantage to national leadership.

Analytical judgment:

The core menswear business bucked the trend, and the efficiency of direct and franchise stores grew rapidly. 2024H1's garment/fabric/other business revenue was 1.019/0.022/0.027 billion yuan respectively, up 0.64%/268.18%/-11.74% year-on-year. (1) By brand, the core business HoDo menswear and OEM apparel achieved revenue of 0.79/0.229 billion yuan, respectively, with a year-on-year increase of 2.96%/-6.61%. (2) Looking at online and offline categories, online/direct/franchise revenue was 0.245/0.357/0.199 billion yuan, up -7.54%/19.03%/-9.87% year on year; as of the end of 2024H1, the company had 1005 stores (482/523 direct/franchise respectively), up 9% year over year (direct management/franchise increase 16%/3%, respectively), and 3 2024H1 net stores (1/4 of direct management/franchise stores), of which 7 were franchised to direct-run stores; it is estimated from this that for half a year Direct store efficiency was 0.7411 million yuan, up 31% year on year; single franchise stores shipped 0.381 million yuan in half a year, up 18% year on year. (3) In the first half of 2024, sales of the “Red Bean Zero Feeling Comfort Shirt” broke through rapidly, and the number of sales increased 27% over the same period.

The record high gross margin was mainly due to direct management contributions. The decline in net profit margin was mainly due to an increase in sales expenses, investment income, and other income.

(1) 2024H1's gross profit margin was 41.05%, up 3.85PCT year-on-year. The increase in gross margin was mainly due to an increase in direct operating gross margin and a decrease in the share of OEM revenue with lower gross margin. The gross margins of clothes/fabric/other businesses were 42.06%/7.99%/32.42%, up 3.35/ -7.27/1.28PCT year on year; among them, the gross margin of HODO menswear and OEM apparel was 47.58%/22.97%, up 0.08/11.85PCT year on year; by channel, the gross margins of online/direct/franchise were 49.57%/63.61%/28.36%, up -1.63/3.62 -5.54PCT year on year. (2) The net interest rate of the 2024H1 company was 4.09%, down 0.19PCT year on year, and the non-net interest rate was 2.1%, down 1.32PCT year on year. Judging from the expense ratio, the 2024H1 sales/management/R&D/finance expenses ratio was 28.92%/7.84%/0.82%/1.69%, respectively, up 2.66/-0.33/-0.38/0.40PCT year on year. 2024H1 investment income/revenue was 2.80%, down 1.62 PCT; the share of other income/revenue decreased by 0.78 PCT to 0.9%, mainly due to a decrease of 52.9% to 0.008 billion yuan in government subsidies; asset impairment loss/income decreased 0.63 PCT to -0.81% year over year; and income tax/revenue decreased 0.16 PCT to 1.46%. (3) 2024Q2's gross profit margin was 41.5%, up 4.4PCT year on year, net interest rate was 0.7%, down 2.8 PCT year on year. The increase in gross margin and the decline in net interest rate was mainly due to a decrease in the share of investment income, other income, and an increase in the share of asset impairment losses; judging from the expense ratio, the 2024Q2 sales/management/R&D/finance expense ratio was 31.3%/9.2%/0.9%/1.8%, respectively, up -0.2/1.1/-0.5/0.2PCT; investment income/revenue was 3.9%, year-on-year decrease 5.0 PCT; the share of other income/revenue decreased by 2.8 PCT to 0.6%; asset impairment loss/income turned losses year over year, down -1.1 PCT to -0.7%.

Follow the company's inventory removal progress. The inventory at the end of 2024H1 was 0.272 billion yuan, up 42.76% year on year. The number of inventory turnover days was 84 days, an increase of 40 days year on year. Accounts receivable were $0.561 billion, down 1.97% year on year. The number of accounts receivable turnover days was 94 days, a decrease of 10 days year over year. Accounts payable was 0.425 billion yuan, up 6.8% year on year. The number of accounts payable turnover days was 157 days, an increase of 23 days year on year.

Investment advice:

We analyzed (1) Against the backdrop of insufficient terminal consumer confidence and a decline in passenger flow due to weather effects, it is not easy for the company's main menswear business to maintain positive growth. We also determined that the background of consumption downgrade favors the company's positioning for cost-effective products. The company uses systematic comfort to promote channel upgrading and create the image of a comfortable menswear store. Strategically, the company first built a good model city in its base in Wuxi and replicated and promoted it to the whole country; (2) The company positioned classic and comfortable menswear, and created popular new products one after another. Zero-feel comfortable shirts launched the first hit, sales broke through rapidly, and the number of sales increased 27% over the same period, and continued to create other new products such as goose down jackets and extra pants.

Considering the lack of confidence in terminal consumers, the revenue forecast was lowered, but considering asset disposal income and the net profit forecast was raised: the 24-26 revenue forecast was lowered by 2.552/2.877/3.193 billion yuan to 2.387/2.506/2.666 billion yuan; the 24-26 net profit forecast was increased by 0.046/0.06/0.076 billion yuan to 0.06/0.076 billion yuan to 0.06/0.083 billion yuan, corresponding to the 24-26 EPS 0.02/ increase 0.03/0.03 yuan to 0.03/0.03/0.04 yuan, and the closing price on August 27, 2024 was 2.07 yuan, corresponding to 24-26 PE 79/68/58X, respectively, maintaining the “gain” rating.

Risk warning

Risk of opening a store falling short of expectations; risk of offline store efficiency falling short of expectations; systemic risk;