Key points of investment

The company released its 2024 three-quarter report. Revenue for the third quarter was -14.2% to 0.85 billion, net profit to mother -70.6% to 13.89 million, net profit after deducting non-return net profit -94.2% to 1.8 million; Q1-3 cumulatively, the company's operating income fell 5.6% to 2.92 billion, net profit to mother -15.2% to 0.16 billion, net profit from non-return to mother -14.1% to 0.14 billion.

Cost rigidity dragged down short-term performance, and financial expenses declined markedly

Looking at the third quarter of a single quarter, the company's revenue was -14.2% to 0.85 billion, of which TEENIE WEENIE's revenue was -11.7% to 0.65 billion, and VGRASS revenue -27.7% to 0.17 billion. Overall gross margin declined slightly by 0.84pp to 68.9%. Although sales expenses/management expenses were -11.0%/-8.6% in absolute terms compared to the same period last year, net profit attributable to mother was -70.6% to 13.89 million, net profit after deducting non-return net profit -94.2% to 1.8 million; financial expenses fell 7.86 million year on year, and financial leverage was further reduced.

Q1-3 Cumulatively, the company's revenue was -6.0% to 2.89 billion. Among them, when split between brands, TEENIEWEENIE/VGRASS was -3.8%/-17.7% to 2.27 billion/0.56 billion, respectively, and Yunjin's revenue was +75.7% to 59.79 million. If you look at the split channels, online channel revenue is -2.0% to 1.09 billion, and offline channel -7.9% to 1.8 billion. Overall, gross margin was -0.16pp to 69.1% yoy, with TEENIE WEENIE down 0.48pp to 67.5% yoy, VGRASS up 1.43pp to 74.9% yoy; online/offline channel gross margin -0.43pp/+0.33pp to 64.1%/72.2% yoy.

On a cumulative basis from January to September, the average price of VG/TW tags changed +2.2%/-0.1% to 3,356 yuan/745 yuan. Due to a decrease in syndicated loan balances and a decrease in interest expenses, the company's financial expenses for Q1-3 totaled -39.8% to 46.13 million.

Further changes in the channel structure

As of 24Q3, the number of TEENIE WEENIE direct-managed/franchised stores was 138 homes/+75 compared to 756 home/304, including 53 direct management to franchise channels. The average monthly sales revenue of the 33 newly opened stores that generated revenue was 0.121 million, and the average monthly sales revenue of the 723 old stores that generated revenue was 0.147 million. The number of VGRASS direct-operated/franchised stores was 2-home/-7 to 135/55, including 3 direct-run transfer channels. The 8 newly opened stores that generated revenue averaged 0.102 million in monthly sales revenue of 0.102 million, generating revenue of 127 old stores.

Profit prediction and valuation: With years of accumulation, the company's brands have established a good brand mentality, accumulated a strong offline sales channel network, and formed a mature online platform. With the continuous improvement of cash flow conditions and the expansion of franchise channels, the company's burden is expected to continue to be reduced and profits are expected to be released. We expect the company's revenue in 24/25/26 to be 4.42/4.76/5.13 billion yuan, or -3%/+8%. We expect the company to achieve net profit to mother of 0.28/0.31/0.34 billion yuan in 24/25/26, -7%/+12%/+11%, corresponding to PE9/8/8X, with great potential to maintain a “buy” rating.

Risk warning: macroeconomic fluctuation risk: industry competition risk; financial risk; R&D design risk;