Incident Overview

2024Q3 The company's revenue/net profit attributable to mothers/net profit deducted from non-mother in a single quarter was 3.444/0.203/0.194 billion yuan, respectively, up 3.15%/-35.97%/-34.50% year-on-year. Our analysis showed a slight increase in revenue mainly due to participation in JD promotions in September and the restart of stores in Q2, but the sharp decline in profit was mainly due to (1) a decrease in interest income of 32 million yuan, (2) an increase in sales expenses of 50 million yuan due to increased marketing investment, and (3) an increase in R&D expenses by 20 Million yuan, (4) impairment accrual increased by 10 million yuan. Non-current asset disposal proceeds of $0.004 billion ($0.002 billion for the same period in '23), government subsidies of $0.011 billion ($0.013 billion for the same period in '23), capital usage fees of $0.005 billion ($0.003 billion for the same period in '23), profit and loss from changes in fair value of financial assets - $0.006 billion (0.007 billion yuan for the same period in '23) billion yuan). The company's revenue/net profit/net profit/net operating cash flow for the first three quarters of 2024 was 93.99/0.755/0.735/-0.365 billion yuan, respectively, up 5.62%/-9.25%/-5.31%/from positive to negative.

The company announced that Mr. Xu Bo, the director and general manager of the company, applied to resign as director and general manager of the company. He intends to be the vice chairman and general manager of Semma Group Co., Ltd., the controlling shareholder of the company, to be responsible for the upgrading and development of Semma Group's overall strategy, and to appoint Mr. Qiu Jianqiang, the chairman of the company, as the company's general manager.

Analytical judgment:

Q3 Revenue increased slightly. The company's revenue in 2024Q3 increased 3.15% year-on-year, and can still achieve positive revenue growth when the market is weak and consumer confidence is insufficient. Our analysis is mainly due to the restart of stores in Q2.

The decline in net interest to mother was slightly higher than gross margin, mainly due to increased sales, finance, and R&D expenses and increased impairment losses. 24Q3 gross margin/net margin was 42.44%/5.88%, year-on-year decrease of 0.84/3.60PCT: 24Q3 company sales/management/ R&D/finance expense ratios were 23.11%/4.88%/2.70%/0.25%, respectively, with a year-on-year increase of 0.69/-0.06/0.48/0.93PCT. The increase in financial expense ratio was mainly due to the decline in interest income from time deposits. Other income/revenue was 0.34%, down 0.08 PCT year on year, mainly due to reduced government subsidies; net gain/revenue from fair value change was -0.18%, down 0.38 PCT year on year, mainly due to a decrease in the fair value of other non-current financial assets; asset and credit impairment loss/income increased 0.23 PCT year over year; and income tax/revenue decreased 0.3 PCT to 2.88%.

Inventories increased significantly from month to month. At the end of 2024Q3, the company's inventory was 4.168 billion yuan, up 14.1% year on year and 46.2% month on month. Our analysis mainly focused on fall and winter storage. The number of inventory turnover days was 180 days, down 24 days year on year. The company's accounts receivable were 1.285 billion yuan, up 27.0% year on year, and the number of accounts receivable turnover days was 38 days, up 3 days year on year. The company's accounts payable was 2.361 billion yuan, up 12.1% year on year. The number of accounts payable turnover days was 110 days, an increase of 6 days over the previous year.

Investment advice

According to our analysis, (1) In the short term, the company took the lead in completing inventory removal and store closure. Since Q2, it has reopened 200 stores. We expect to net open 350 stores throughout the year. “New basic stores” are expected to improve store efficiency and motivate franchisees to open stores. In the casual wear business, the company's overall positioning is “New Semma” to provide families with a full-scene shopping experience including adult clothing, children's clothing, and shoe accessories; creating Semma memory items, iterating mental products, achieving large-scale single products, reducing the long tail, and increasing the head contribution rate, which is expected to successfully create large single products to drive sales growth; (2) In the medium term, revenue growth is driven by: overseas stores, PUMA and ASICS children's category agents, new retail, etc.; (3) In the long run, there is still room for net interest rate repair as the company controls fees and online discounts. Considering that Q3 fell short of expectations, the 24-26 revenue forecast was adjusted to 14.789/16.128/17.178 billion yuan; net profit to mother for 24-26 was reduced by 1.234/1.456/1.721 billion yuan to 1.12/1.322/1.546 billion yuan; corresponding to a 24-26 EPS reduction of 0.45/0.52/0.63 yuan to 0.42/0.49/ 0.57 yuan, with a closing price of 6.4 yuan on October 30, 2024, corresponding PE was 15/13/11X, respectively, maintaining a “buy” rating.

Risk warning

Risk of increased sales expenses; risk of opening a store below expectations; risk of high inventory; systemic risk.