The company announced 3Q24 results. Revenue for the first three quarters was +5.62% to 9.399 billion yuan; net profit to mother was -9.25% to 0.755 billion yuan; in the third quarter, revenue was +3.15% to 3.444 billion yuan; and net profit to mother was -35.97% YoY to 0.203 billion yuan. The company's third-quarter performance growth slowed, mainly due to increased investment in the company's channels and R&D expenses during the period. Looking ahead to the fourth quarter, we expect terminal performance to improve month-on-month, while the company continues to optimize and adjust channels and increase investment in products and marketing. We believe it has laid the foundation for the company's medium- to long-term development and maintain the purchase rating.

Online performance was superior to offline, and terminals improved month-on-month in October

Looking at each channel, considering that 3Q24 offline traffic is affected by weather and consumer confidence, and that online benefits from the company's global retail strategy and the strength of multiple platforms, we expect the growth rate of online sales to be superior to offline. By brand, thanks to Balabara's leading competitive advantage in the field of children's clothing, we expect the growth rate of 3Q24's children's clothing business to be higher than that of Semma's main brand. Looking ahead to 4Q24, considering October benefiting from the recovery in passenger flow during the 11th Golden Week and seasonal demand brought about by cooling, combined with the catalysts of subsequent online shopping festivals and the increase brought about by the opening of new offline stores, we expect terminal sales performance to improve month-on-month in the fourth quarter.

Expenses have been increased to layout development, and the level of profit has declined

The 3Q24 company's gross margin was -0.84pct year-on-year to 42.44%. We expect this is mainly due to rising procurement costs and promotional activities during the period. In terms of expenses, due to the increase in store opening expenses and marketing investment, the company's sales expenses ratio was +0.69pct year-on-year to 23.11%. With increased investment in product research and development, the company's R&D cost ratio was +0.48pct to 2.70% year-on-year. The financial expense ratio or the impact of the financial income received and the time of maturity was +0.93pct to 0.25% year-on-year. Overall, the company's net profit margin was -3.59pct to 5.88% year-on-year.

Improved inventory turnover efficiency, and short-term fluctuations in cash flow from new product purchases

As of 3Q24, the company's inventory was +14.10% year-on-year to 4.168 billion yuan, mainly due to winter equipment goods. The number of inventory turnover days was -23.84 days to 179.83 days year on year, improving operational efficiency; the number of accounts receivable turnover days was +3.24 days to 37.75 days year on year, which remained steady. Net cash flow from operating activities was -143.33% to -0.36 billion yuan compared to the same period due to new product purchases and loan repayment.

Profit forecasting and valuation

We forecast net profit attributable to mother in 2024-26 to -2.6%/+18.2%/+14.7% to 1.09/1.29/1.48 billion yuan, respectively, and EPS of 0.41/0.48/0.55 yuan for the same period. The company's industry is branded apparel. We selected comparable companies in the same industry for valuation. Wind Comparable's 25E PE average value is 10.3x. Considering that the company is a leading domestic children's clothing and casual wear brand, channel optimization and expansion are expected to bring continuous development and enjoy a certain valuation premium. Based on PE 15.7x in 2025, we gave a target price of 7.50 yuan to maintain a “buy” rating.

Risk warning: 1) Consumption recovery falls short of expectations; 2) competition in the children's clothing market is fierce; 3) The effects of the company's channel adjustments fall short of expectations.