Key points of investment

The company released 24 interim report. 24H1 achieved revenue of 1.13 billion yuan, -9.5% YoY, realized net profit attributable to mother/ net profit of 0.22 billion yuan/0.19 billion yuan, respectively, -27.5%/-25.9% YoY, and 24Q2 achieved revenue of 0.59 billion yuan, or -7.1% YoY, achieving net profit attributable to mother/ net profit of 0.11 billion/- 20.8%, due to weak consumption+channel optimization and adjustment, revenue was under pressure in the short term, and profit declined more profoundly than revenue due to cost rigidity.

Revenue fluctuates in the short term due to weak consumption. Looking at the distribution of channel adjustments by brand, 24H1 DA/DZ/DM/RA revenue was -13.5%/-4.7%/-7.6%/-0.9% to 5.7/0.47/0.07/0.02 billion yuan respectively, with gross margins -0.8pct/+0.2pct/-0.9pct to 76.3%/73.5%/79.7%/79.4%. On the one hand, revenue pressure is weak consumption. 24H1 Chinese consumers The average confidence index was -2.6% to 88. On the other hand, inefficient stores were closed. DA/DZ/DM closed 86/37/1 stores to 504/428/23 compared to the previous year. Channel optimization and adjustments compounded weak consumption caused short-term performance fluctuations, but in the long run, it is conducive to improving channel quality and efficiency and improving brand power.

Revenue fluctuated in the short term due to the closure of inefficient stores. Looking at the single-store delivery improvement sub-channel of the franchise channel, 24H1 direct-operated/franchise/online stores were -19.0%/-1.0%/-3.1% to 0.45/0.48/0.19 billion yuan, respectively, and gross margin was +0.8 pct/-0.01pct/-2.3pct to 80.3%/69.9%/77.6% year-on-year, respectively. The decline in revenue was mainly due to the closure of inefficient stores. The number of direct/franchise stores closed 26/94 to 271/706, respectively. 24H1 direct-managed/single-store revenue was -11.3%/+12.1% year-on-year to 1.678/0.683 million yuan, respectively. The improvement in franchise single-store delivery revenue shows the confidence of franchisees. The decline in revenue from direct-run single stores is expected to decrease significantly in offline traffic in Tier 1 and 2 cities where direct-run stores are located.

Profitability is under pressure in the short term, and inventory turnover fluctuates

24Q2 The company's gross margin/sales expense ratio/management expense ratio/R&D cost ratio/net profit margin were +0.3 pct/-1.7pct/+1.8pct/-0.03pct/ -3.4pct to 75.2%/36.6%/8.4%/2.8%/19.0%, respectively. The gross margin increased steadily and slightly increased during the period, mainly due to increased management expenses and reduced revenue cost rigidity, temporarily reducing short-term profitability. The number of 24H1 inventory turnover days was +34 days to 273 days year on year, and the number of inventory turnover days increased year over year, mainly due to weak consumption, which fell short of expectations for spring and summer clothing sales.

Profit forecasting and valuation

Due to weak terminal demand and channel adjustments, the short-term phased performance is greatly optimized to benefit channel construction and brand strength improvement in the long term. The company is expected to achieve net profit of 0.4/0.43/0.47 billion yuan in 24/25/26, corresponding to a year-on-year growth rate of -19.0%/+8.4%/+7.2%, corresponding to the current market value PE of 13X/12X/11X, and the company's dividend rate in '23 was 85.3%, corresponding to a dividend rate of 6.7% in '24, maintaining a “buy” rating.

Risk warning: Terminal consumption power declines; store efficiency improvement falls short of expectations