Gross margin increased to 46.4% in 2024, higher than expected

Chaoyun Group (6601 HK) achieved total revenue of 1.25 billion yuan (RMB, same below) in the first half of the year, an increase of 10.3% over the previous year.

The company's overall gross margin increased 5.1 percentage points to 46.4% in the first half of the year due to the company's crawler launch of popular single products, rising average unit prices, and falling raw material prices. In terms of expenses, sales expenses and administrative expenses increased slightly due to increased advertising and promotion and labor expenses. The cost rate was 32.4%, which was generally stable. The company's overall profitability increased. Net profit for the first half of the year was 0.18 billion, up 31.5% year on year, and net profit margin rose 2.3 percentage points to 14.4%. The company paid HK$0.059 for half a year, and the dividend rate maintained a solid 40% home care moat; the pet category accelerated the expansion of the company's basic home care revenue. Among them, the revenue of the insecticide-repellant/household cleaning/air care industry increased by 12.7%/8.2%/2.4%, respectively, and the home care category accounted for 70.4% of revenue. Insecticidal and mosquito repellent products have the highest market share for nine consecutive years, and household cleaning products have maintained the second largest market share, proving that consumers are more loyal to brands and are more loyal to users. The company consolidates the moat in the home care category with existing best-in-class products, superimposed products to introduce new products, and has potential product reserves. The pet category's revenue for half a year was 48 million, up 5.3% year over year. The offline pet store business continues to expand. As of the first half of the year, Miley and Catch Cat Planet had 46 stores. The company aims to expand to 65 by the end of the year, and will test the franchise model. The gross margin of the pet category increased from 45.4% to 49.5% in the first half of the year, thanks to improved operational efficiency. The company aims to achieve store-side profitability by 2025.

Omni-channel expansion of product coverage

By channel, online/offline revenue increased 18.9%/6.5% year-on-year respectively. Deeply involved in Taoxi, JD, and Pinduoduo platforms online, the JD Mosquito Repellent Product Super Category recorded sales of more than 10 million; during the “618” e-commerce promotion period, the company's sales of all categories increased by more than 30% year-on-year; the online sales volume of mosquito repellent spray, a popular product in the first half of the year, was about 11 times that of the same period last year. Offline consolidates the characteristics of multiple brands and categories by expanding the membership system, enhancing the image of sales points, etc., and expands basic market coverage. Online/offline gross margin was 54.4%/41.9% respectively, an increase of 6.3/4.1 percentage points.

Increase FY24E's net profit to 0.194 billion; maintain the “buy” rating based on gross margin and net profit exceeding expectations in the first half of the year, increasing FY24E's annual gross margin by 4.1 percentage points to 46.7%, and increasing net profit by 4.4% to 0.194 billion yuan. As of the first half of the year, the company's capital reserves were 2.66 billion, and there were no bank liabilities. Continuing the valuation after cash, the target price was adjusted to HK$2.94, corresponding to FY24E, the price-earnings ratio after excluding cash is only about 4.6 times. The company maintains a high dividend payout ratio, with a dividend ratio of around 7%. Maintain a “buy” rating.