FY25H1 sales are under pressure, mainly due to a year-on-year decline in offline customer traffic. FY25H1 (March-August 2024) recorded revenue of 13.05 billion yuan, a year-on-year decrease of 7.9%, mainly due to weak demand, a double-digit year-on-year decline in same-store customer traffic; achieved net profit of 0.87 billion yuan, a year-on-year decrease of 34.7%; and achieved net cash from operating activities of 2.61 billion yuan, an increase of 2.5% year on year. FY25Q2 (June-August 2024) The company's total retail and wholesale sales recorded a low 10-20% year-on-year decline. The decline was greater than FY25Q1 (decrease in the number of units in the middle). The lower number of units fell in the same period last year.

The gross margin decreased by 3.6 pct year on year, and cost control was effective. FY25H1's net profit margin was 6.7%, down 2.7 pct year on year. See 1) Gross profit margin of 41.1%, down 3.6 pct year on year, mainly due to weak sales pressure, company discounts deepened; discounts increased the share of online revenue with deeper discounts compared to offline; provision for inventory impairment at the end of the period was 0.26 billion yuan, an increase of 0.12 billion yuan year-on-year, and an increase of 0.09 billion yuan during the period.

It accounted for 2.0% of revenue, and a year-on-year increase of 1.0 pct dragged down gross profit margin. 2) The cost rate was 33.1%, an increase of 0.2 pct over the previous year, of which the rent/employee/other expenses ratio was -1.3/+0.4/+1.1 pct, respectively. The decline in the rental rate is mainly due to the continuous streamlining and optimization of the offline store network, as well as changes in the channel mix. The company adopted a flexible rental structure linked to performance and sought better property conditions. The estimated rent cost decreased by 17.2% year-on-year during the period. Employee expenses have risen slightly. On the one hand, the decline in revenue has brought negative operating leverage; on the other hand, the company has promoted a global layout, and the number of employees related to the live streaming business has increased. Overall, in the first half of the fiscal year, under revenue pressure, the company's expenses were effectively controlled to maintain a high level of operating efficiency.

Major brands are being adjusted, and direct-run stores continue to be streamlined. Looking at the breakdown, the main brands/other brands/joint venture fees/e-sports revenue decreased by 8.1%/6.5%/15.7%/0.5% year on year, respectively. The revenue of the main brand was lower than that of the other brands. We judge that sales of one of the main brands fell short of expectations, and the company will cooperate with it to make business adjustments in the next phase. Revenue from the retail/wholesale business decreased by 8.9%/2.2% respectively, with online/offline accounting for 30%/70% of the retail business, respectively. The share of retail business has declined, putting a drag on gross margin. At the end of the period, the company had 5,813 direct stores, down 6.4% year on year; gross sales area decreased 1.9% year on year, and single store sales area increased 4.8% year on year.

Inventories have risen slightly but are overall manageable. At the end of the period, the company's inventory was 6.12 billion yuan, up 6.4% year on year. The number of inventory turnover days was 148 days, an increase of 7 days over the previous year. Sales were weak, and inventories increased year over year, but overall manageable.

The dividend payout ratio of nearly 100% was maintained in the medium term. The company declared an interim dividend of RMB 0.14 per share. The latest closing price calculated an interim dividend rate of 5.5%. The dividend payout ratio was 99.4%, up from 74.2% in the same period last year.

Profit forecasting and valuation. The company consolidated the operation of the main brand and accelerated the layout of the segmented boom circuit. Further promote global retail, optimize operating efficiency, and continue to return shareholders with abundant cash inflows and high and stable dividend rates. We expect FY2025-FY2027's net profit to be $1.325/1.8/2.152 billion, respectively, giving FY2025 PE 13-15 times, and the corresponding reasonable value range is HK$3.02-3.48 per share based on HKD1 = RMB 0.92, maintaining a “superior to market” rating.

Risk warning. Consumer preferences have changed, the retail environment has deteriorated, industry competition has intensified, and brand partnerships have changed.