Key points of investment

Q3 revenue -21%, cost increase compounded by increased sales investment, resulting in a single quarter loss of 75.3 million1) 24Q1-Q3: Revenue of 4.48 billion yuan, a year-on-year decrease of 12%, net profit to mother of 0.16 billion yuan, a year-on-year decrease of 59%, after deducting 0.12 billion yuan of non-return to mother, a decrease of 60% year-on-year;

2) Single Q3: Revenue 1.16 billion yuan, a year-on-year decrease of 21%, net profit to mother -0.075 billion yuan. Last year's Q3 profit was 93.13 million yuan, Q2 lost 18.2 million; deducted non-return to mother -0.115 billion yuan; after deducting non-return of 35.78 million yuan in Q3 last year.

In Q3, revenue decreased by 21%, and domestic business declined by 27%. Among them, revenue due to strategic adjustment factors (measures such as switching between online and offline dealers, reducing social inventory in department stores, closing SPA stores, etc.) was about 13%, and our own business declined by about 14%; overseas business improved month-on-month.

On the one hand, Q3 lost revenue due to the company's active strategic adjustments, while adjusted business costs did not decrease in the same proportion, lowering the overall gross profit margin; on the other hand, Q3 invested more sales expenses for brand building.

Profitability: gross margin - 3pp, loss due to a significant increase of 7pp in sales expense ratio 1) 24Q1-Q3: gross profit margin of 59.4% (YoY -0.1pp), net profit margin 3.6% (YoY - 4pp), sales/management/R&D expense ratios were 45.1%/8.6%/2.3%, respectively, +1.7pp/-0.6pp/+0.1pp; 2) Single Q3: gross profit margin of 54.5% (y-3pp, month-on-month - 13pp), net profit margin -6.5% (y-13pp), sales/management/R&D expenses, respectively 50%/11.4%/3.1%, +7pp/+0.2pp/+0.6pp year over year.

Q3 gross margin decreased by 3.2% percentage points year on year due to strategic adjustment factors. After excluding the impact of the adjustments, the gross margin of domestic business increased by 1.1% year on year. The Q3 sales expenses rate increased significantly. On the one hand, revenue declined; on the other hand, it was also affected by marketing activities such as the Baicao Collection title Tan Kenji concert, Yazawa signed ambassador Hou Minghao, and Goff signed ambassador Wang Xingyue.

The division system reform continues to be deepened. The average price of the Q3 personal care division increased 4.7% year on year. The company continued to deepen the domestic business division system reform, adjust the entire nursing and beauty division, establish a new innovative division, improve the front, middle, and back office structure, and attract talents who have broken the game to join. The average sales price performance of the Q3 Personal Care Division was impressive. The revenue split of each division was as follows: 1) Personal Care: Revenue 0.53 billion, accounting for 46%; average price 9.1 yuan, up 4.7%; 2) Overseas: Revenue 0.37 billion, accounting for 32%, average price 15.2 yuan, same increase of 0.5%; 3) Innovation: Revenue 0.15 billion, accounting for 13%, average price 9 yuan, same decrease of 19.3%; 4) Beauty: Revenue 0.1 billion, accounting for 8%, average price of 22 yuan, same decrease of 0.4%.

Profit forecasting and valuation

As an established domestic product leader that is deeply involved in beauty and daily chemicals, the company actively promotes organizational transformation, deepens division reform, and continues to promote category renewal and channel upgrading. We expect net profit to be 0.27/0.49/0.62 billion yuan in 24-26, -47%/+87%/+26% year-on-year, corresponding to PE 42/22/18X, respectively, to maintain the “gain” rating.

Risk warning: Competition in the industry intensifies, new product promotion falls short of expectations, etc.