Consumer goods revenue returned to growth, and member penetration increased smoothly. The company is a leading online fitness platform.

2024H1's revenue increased 5.4% year over year, and private brand products/membership and online payment/advertising changed 8%/-3%/42% year over year to 0.5/0.44/0.1 billion yuan, respectively. 1) Consumer goods revenue returned to growth, mainly due to an increase in sales through wholesale channels. 2) Membership and online payments: The decrease in revenue generated by virtual sports events was partially offset by an increase in online membership revenue. The company's 2024H1 average monthly activity (MAU) rose 0.5% to 29.7 million people, and the membership payment penetration rate was 11.1%, an increase of 1 pct over the previous year. In March '24, the company launched an upgrade to version 8.0 of the Keep App, which aims to bring users a richer sports experience, expand access to outdoor and hobby activities through comprehensive and convenient functions and extensions, and incorporate innovative gameplay interactive settings. 3) Advertising: The sharp increase is mainly due to online to offline integrated advertising services.

The gross profit margin and expense ratio have improved, and adjusted net profit and loss have been reduced significantly. 2024H1's gross profit margin was 46.0%, up 3 percentage points year on year. Private brand products/membership and online payment/advertising changed +4/+8/-12 percentage points year over year to 31.5%/67.9%/22.8%, respectively. The obvious increase in gross margin of membership and online payment services is mainly due to a decrease in revenue from virtual sports events and optimization of IP costs for third-party talent partnerships. At the same time, the company optimized storage, packaging and delivery expenses, and stock remuneration incentives. The cost ratio decreased by 6 percentage points year on year. Among them, expenses related to contract execution, administration, and research and development dropped a lot. The increase in sales expenses is mainly due to the development of more marketing activities for brand promotion and user acquisition. Under the combined optimization of costs and expenses, 2024H1 lost 0.16 billion yuan in adjusted net profit, a decrease of 28% over the previous year. The adjusted net loss ratio was 15%.

Risk warning: weak macroeconomy; increased industry competition; continued decline in monthly activity; systemic risk.

Investment advice: The loss reduction trend is improving, and pay attention to the overall consumption recovery environment. The company broadened its online layout and increased member-only content. The paid penetration rate and average revenue of monthly active users all increased markedly. The company is deeply involved in refined operations in consumer goods to improve supply chain efficiency and R&D efficiency. With the continuous release of scale effects, superimposed operating efficiency continues to improve, and promote steady improvement in both directions of revenue scale and profit structure. Maintaining the profit forecast, the 2024-2026 adjusted net profit is expected to be -2.4/-0.5/+0.03 billion yuan. Considering the smooth progress of the business, the target price was raised to HK$5.9-6.3 (originally HK$4.4-4.6), corresponding to the 2024 PS 1.2-1.3x, maintaining the “superior to market” rating.