2024H1: Revenue +7% YoY /Net Profit without return to mother +13% YoY. The company released an interim report: 1) 2024H1's revenue was 5.95 billion yuan, +7% year over year, net profit to mother was 0.55 billion yuan, +7% year over year, net profit after deducting non-return to mother was 0.54 billion yuan, +13% year over year ((non-operating income decreased by 0.024 billion yuan year on year, mainly due to a decrease of 0.02 billion yuan in profit and loss due to changes in the fair value of transactional financial assets and liabilities, and a decrease of 0.013 billion yuan in government subsidies). 2) In terms of profit quality, 2024H1's gross margin was +1.5pct to 46.1% year over year, mainly due to an increase in e-commerce gross margin; sales/management/finance expense ratios were +0.8/-0.2/-0.8pct to 26.0%/4.8%/-2.2% year over year, the increase in sales expenses was mainly due to increased publicity and service fees, and the financial expense ratio was mainly due to an increase in interest income from term deposits; overall, the 2024H1 net margin remained flat at 9.2% year on year.

2024Q2: Revenue +10% YoY /Net Profit without return to mother +8% YoY. Looking at the second quarter of a year: 2024Q2 revenue was 2.82 billion yuan, +10% year over year, net profit to mother was 0.21 billion yuan, +1% year over year, net profit after deducting non-return to mother was 0.2 billion yuan, +8% year over year. In terms of profit quality, 2024Q2 gross margin was +0.6pct to 45.5% year over year; sales/management/finance expense ratios were +0.4/-0.5/-0.4pct to 27.7%/5.4%/-2.3% year over year, respectively; above comprehensive, net margin was -0.7 pct to 7.3% year over year.

By brand: children's clothing and adult clothing 2024H1 both showed steady year-on-year growth, and the efficiency of product retail innovation continues to be reflected. The company continues to strengthen product functionality and fabric research and development to promote sales, reduce costs, and increase efficiency through retail sales. By brand:

1) Children's clothing business: 2024H1 children's clothing business revenue +6% year-on-year to 4.07 billion yuan, gross margin +3.1 pct to 49.6% year over year, with a total of 5,385 stores at the end of the period (495 new stores were opened, 344 were closed, and 151 stores were closed compared to the beginning of the year). The children's clothing business concentrated resources on creating popular products, and launched Sanrio IP co-branded, sunscreen categories, and Guofeng series products, which were well received by consumers. 2) Adult casual wear business: 2024H1 adult clothing business revenue +8% year-on-year to 1.81 billion yuan, gross margin -2.1pct to 38.6% year over year, with a total of 2,755 stores at the end of the period (235 new stores were opened and 183 closed, net increase of 52). The Semma brand continues to strengthen product functionality and fabric research and development, launch a variety of smart products and enhance brand consistency through global marketing renewal.

Channel division: Improving e-commerce profit quality, optimizing the offline channel structure, and entering the stage of net store opening. 1) E-commerce: Steady growth in sales and improvement in profit quality. 2024H1's online sales were +3% YoY to 2.69 billion yuan, and gross margin was +5.7pct YoY to 47.4%. 2) Offline: 2024H1's offline direct-management/franchise/joint channel revenue was 0.7/2.4/0.09 billion yuan, which was the same as +5%/+12%/year-on-year, with gross margins of -3.2/-1.5/-0.5pct to 67.2%/38.1%/62.2%, respectively. The number of stores was +158/+21/+24 from the beginning of the year to 839/7185/116, respectively. The company continues to open new high-quality stores and eliminate inefficient stores. Focusing on consumers, deepening product reform and promoting flexibility in supply chain operations, we judge that improvements in medium- to long-term brand strength and management efficiency are expected to continue to contribute to the growth of store efficiency.

Inventory turnover is continuously optimized, and cash flow management is in line with seasonal characteristics. We judge that the current inventory age structure is good and the inventory turnover is healthy. At the end of 2024H1, the company's inventory was -10.2% year over year to 2.85 billion yuan, and the number of inventory turnover days was -48.3 days to 157 days year over year. The 2024H1 operating cash flow was a net outflow of 0.01 billion yuan, mainly due to an increase in payment payments in the current period. We judge that it is in line with seasonal characteristics and is expected to improve in the future.

Both revenue and results are expected to grow steadily in 2024. 1) According to industry trends, we judge that the distribution end of the 2024H1 company has increased slightly year-on-year. Considering the pace of franchisee delivery, we estimate that the 2024H1 shipping side is growing faster than the logistics end, and H2 is expected to continue this trend. 2) Taking into account the annual channel plan, we estimate that the company's revenue is expected to grow steadily in 2024/performance is expected to increase by about 10%.

Investment advice. The company is a leader in popular apparel and children's clothing. We expect net profit to be 1.236/1.394/1.527 billion yuan from 2024 to 2026, corresponding to 10 times PE in 2024, maintaining a “buy” rating.

Risk warning: Risk of fluctuations in the consumer environment; Semma brand business reforms fall short of expectations; channel expansion falls short of expectations; overseas business expansion falls short of expectations.