2024H1 will resume net development offline, and is optimistic that the 2024H1 company will continue to grow in the second half of the year. The 2024H1 company achieved revenue of 5.95 billion yuan (+7.1% year over year), and net profit attributable to mother/non-mother was 0.55/0.54 billion yuan, an increase of 7.1%/12.7%; of these, 2024Q1/Q2 revenue was +4.6%/+10.1%, respectively, and net profit to mother was +11.4%/+0.7%, respectively. Due to pressure on 2024H1 offline retail customer flow, we lowered our 2024-2026 profit forecast. We expect net profit for 2024-2026 to be 1.23/1.39/1.53 billion yuan (previous value was 1.29/1.47/1.63 billion yuan), corresponding EPS was 0.46/0.52/0.57 yuan, respectively. The current stock price corresponding PE is 9.9/8.8/8.0 times. Considering 2024H1's offline recovery and net development, we are optimistic that the second half of the year will continue to grow under channel expansion. Maintain a “buy” rating.

Offline retail sales have resumed and achieved scale growth by product. Under high-quality e-commerce operations, 2024H1 casual wear revenue was 1.81 billion yuan, an increase of 7.66%, and children's apparel revenue was 4.07 billion yuan, an increase of 6.43%. At the same time, overseas expansion progressed steadily. 2024H1 Barabara opened 7 new stores in Vietnam and settled in Shopee. By channel, online channel: 2024H1 online sales were 2.69 billion yuan, an increase of 3.36%. Offline channels: direct/franchise/joint sales were 0.7/2.4/0.085 billion yuan respectively, +4.96%/+11.82%/+0.29% year-on-year, respectively. Looking at the number of stores, as of the end of 2024H1, the total number of stores was 8,140, with a net opening of 203 compared to the beginning of the year; of these, direct-operated/franchised/joint ventures were 158/21/24 compared to the beginning of the year, respectively, returning to a net opening trend. In the second half of the year, I am optimistic that the company will continue to optimize the channel structure and seize new channel growth opportunities.

Profitability remains at a good level, and the quality of operations is steadily improving

Profitability: The gross margin of online and children's clothing has increased, and profitability has remained at a good level. The overall gross margin of the 2024H1 company was 46.1% (+1.5pct year over year), mainly due to increased sales discount combined with supply chain cost control. By channel, direct management/franchise/online gross margin was -3.2/-1.5/+5.7 pct, respectively. By brand, the gross margin of casual and children's clothing was -2.1/+3.1 pct, respectively. The cost rate during 2024H1 was 30.6%, +0.01pct year-on-year, with sales/management/finance/R&D expense ratios of +0.8/-0.8/+0.2pct, respectively. Overall, the net interest rate due to 2024H1 was 9.3%, the same as the previous year. Operating capacity: Inventory size and structure are clearly optimized, and active reserves affect cash flow in the short term. As of the end of 2024H1, the company's inventory size was 2.85 billion yuan (-10.2% YoY), and the inventory turnover period was 157 days (-48 days year-on-year). The number of new products stored within 1 year has increased steadily compared to the beginning of the year and year over year, accounting for more than half. The company's accounts receivable turnover days as of the end of 2024H1 was 33 days (+2 days compared to the previous year).

2024H1 net cash flow from operating activities was -0.005 billion yuan (decrease of 0.84 billion yuan), mainly due to an increase in purchase payments and advance payments in the current period.

Risk warning: Franchisee delivery falls short of expectations, store development falls short of expectations, retail recovery falls short of expectations.