Key points of investment:

The company released its 2024 mid-year report. The performance was in line with expectations. The decline in the second quarter was narrower than in the first quarter. In the first half of the year, the company was mainly affected by weak terminal demand and channel optimization adjustments. Revenue was 1.13 billion yuan, down 9.5% year on year, net profit of 0.22 billion yuan, down 27.5% year on year, after deducting non-net profit of 0.19 billion yuan, down 26% year on year. Overall performance was in line with expectations. The company's revenue for the second quarter was 0.59 billion yuan, down 7% year on year, and net profit to mother was 0.11 billion yuan, down 21% year on year. Compared with the 12%/33% decline in revenue/profit in the first quarter, the decline has narrowed.

By brand, menswear brands performed well, while womenswear brand store adjustments led to a decline. 1) Main brand DA stores have been adjusted a lot, and revenue has declined by 13%. DA revenue was 0.57 billion yuan, down 13% year on year, gross profit margin was 76.28%, down 0.8 pct year on year, and closed 37 stores to 504. 2) High-end brand DM revenue fell 8%. DM's revenue was 67.6 million yuan, down 8% year on year, gross profit margin was 79.7%, down 0.2 pct year on year, and closed 1 store to 23. 3) DZ brand revenue fell 5%, and gross margin increased steadily. DZ's revenue was 0.47 billion yuan, down 5% year on year, gross profit margin was 73.5%, up 0.2 pct year on year, and closed 22 stores to 428. 4) Menswear brand RA performed better than other brands. RA's revenue was 21.19 million yuan, down 1% year on year, gross profit margin was 79.4%, down 0.9 pct year on year, and the number of stores remained the same as the same period last year.

By channel, offline actively adjusts inefficient stores, and online performance is better than offline. 1) Direct management channels focus on improving the quality of operations, and gross margin increased year-on-year. In the first half of the year, the company's direct channels closed 5 to 271 stores, with direct revenue of 0.45 billion, a year-on-year decrease of 19.0%, gross profit margin of 80.3%, and an increase of 0.8 pct year-on-year, maintaining a good trend of steady and steady growth. 2) Distribution channel revenue and gross margin performance are stable. Distribution channels closed 55 to 706 stores, and distribution revenue was 0.48 billion yuan, down 1% year on year, and gross profit margin was 69.9%, the same as year on year. 3) Online channel sales declined slightly. Online e-commerce revenue was 0.19 billion, down 3% year on year, and the performance was superior to online. The gross profit margin was 77.6%, a year-on-year decrease of 2.3 pct, which is expected to be related to increased discounts.

Profitability declined in the short term, and the quality of asset operations was steady. 1) The gross margin is basically stable, and the increase in the cost ratio has led to a decrease in the net interest rate. Gross margin was 75.4%, down 0.4 pct year over year. The sales expense ratio was 39.1%, down 0.1 pct from the previous year, mainly due to the reduction in sales staff wages and remuneration, rent and shopping mall expenses. The management cost rate was 8.8%, up 2.1 pct from the previous year, mainly affected by the increase in managers' remuneration and renovation costs. The decrease in financial revenue affected the net interest rate by 2 pcts. The final net profit margin was 19.8%, down 4.8 pcts from the previous year. 2) Stable asset quality. Inventories were 0.46 billion, up 18% from year-end. The number of inventory turnover days increased by 34 days to 273 days year over year. Net cash flow from operating activities was 0.15 billion, a year-on-year decrease of 58%. Mainly due to a decrease in revenue and an increase in expenses payments, the balance ratio was 26%, and overall operations were stable.

The company is deeply involved in the middle and high-end women's clothing industry. The brand is strong and has high profitability. Short-term retail pressure does not change the medium- to long-term positive trend, and maintains an “increase” rating. Considering that retail sales are still recovering weakly, we lowered the company's profit forecast. We expect net profit to be 0.39/0.42/0.46 billion yuan for 24-26 (originally 0.47/0.53/0.58 billion yuan), respectively, and the corresponding PE is 13/12/11 times, respectively. Considering that the average PE of a comparable company in 24 years was 14 times, the company was given an average PE of 14 times in 24 years, with a target market value of 5.4 billion yuan. Compared with the present, there is still room for growth of 7%, maintaining an increase in holdings rating.

Risk warning: Consumption recovery falls short of expectations; market competition increases risk; risk of inventory backlog.