Matters:

The company released its 2024 mid-year report. In the first half of the year, the company achieved revenue/net profit attributable to mothers/net profit excluding non-return to mother of 5.95/0.55/0.54 billion yuan, +7.1%/+12.7% year-on-year. In the second quarter of a single quarter, the company achieved revenue/net profit attributable to mothers/net profit excluding non-attributable net profit of 2.82/0.21/0.2 billion yuan, +10.1%/+0.7%/+8.2% year-on-year.

Commentary:

The children's clothing business has performed steadily, and casual wear has returned to a growth trajectory. The company continues to promote digital operations and personnel team building, and promote the transformation of the company into a retail organization. Improved operational efficiency. In 24H1, children's wear/casual wear achieved revenue of 4.07/1.81 billion yuan, +6.4%/+7.7%. Among them, the Semir brand successfully promoted transformation and upgrading, driving the casual wear business back to growth; the gross profit margin was 38.6%/49.6%, compared to +3.1/-2.1pcts. By the end of the second quarter, the number of children's wear/casual wear stores was 5,385/2,755, a net increase of 151/52 compared to the beginning of the year. The pace of opening stores remained stable.

Channel adjustments will start again, and offline channel efficiency will improve. 24H1, online/direct/franchise/affiliate channels achieved revenue of 26.9/0.7/2.4/0.09 billion yuan, +3.4%/+5.0%/+11.8%/+0.3%; gross profit margin 47.4%/67.2%/38.1%/62.2%, +5.7/-3.2/-1.4/-0.5pcts year over year. By the end of the second quarter, the number of direct-operated/franchise channel stores was 839/7185, a net increase of 158/21 compared to the beginning of the year. Among them, the average efficiency of direct-management/franchise channel 24H1 was +1.5%/+16.3%, respectively.

Profitability continues to improve, and expense rates are well controlled. In the second quarter of a single quarter, the company achieved a gross profit margin of 45.5%, +0.6pcts compared to the same period. The increase in gross margin was mainly due to improved sales discounts and the improvement of the company's supply chain management capabilities.

On the expense side, the company's sales/management/finance expense ratio was 27.7%/5.4%/-2.3%, +0.4/-0.5/-0.4pcts year-on-year.

Taken together, the company achieved a net interest rate of 7.3% to mother in 24Q2, -0.7 pcts year on year, mainly due to the 24Q2 income tax rate of +8.5 pcts year on year to 28.5%.

Inventory levels have declined, and cash flow has fluctuated. As of the end of the second quarter of '24, the company's accounts receivable turnover days was 33 days, an increase of 2 days; the inventory size was 2.85 billion yuan, -10.2% year over year, and inventory turnover days were -48 days to 159 days year on year, and inventory pressure was clearly removed. 24H1's net operating cash flow was -5.426 million yuan, mainly due to an increase in payment payments for autumn and winter purchases.

Investment advice: The company recently released a draft equity incentive plan, demonstrating the confidence of industry leaders in future development. We are optimistic that the company will continue to improve business efficiency under a global integration strategy, and expect both revenue and profit sides to maintain relatively rapid growth. Considering that offline consumption is still under pressure, we lowered our profit forecast. We expect the company's net profit to be 1.25/1.42/1.58 billion yuan in 2024-26 (1.27/1.45/1.63 billion yuan before 24-26), corresponding to the current PE price of 10/9/8 times. Using a relative valuation method, referring to comparable company valuations, the company was given a 24-year PE of 12 times, corresponding to a target price of 5.57 yuan/share, maintaining a “strong” rating.

Risk warning: Terminal consumption recovery falls short of expectations; market competition intensifies; store expansion falls short of expectations, etc.