Description of the event

The company achieved revenue, net profit attributable to mother, net profit after deducting net profit of 3.889, 0.271, and 0.24 billion yuan in 2024Q3, with year-on-year changes of -11%, -65%, and -57%. Revenue results all fell short of expectations (previously expected return -40% to -30%). A total of 15.259, 1.908, and 1.749 billion yuan of revenue was achieved in the first three quarters, or -2%, -22%, and -21% year-on-year.

Incident comments

Weak retail dragged down the offline sales of main brands, and franchises continued to close stores. 1) Main brand: Q3 revenue -27%. Looking at the breakdown, offline store sales are expected to drop a lot year-on-year in a weak retail environment. Among them, franchise pressure is significant. E-commerce revenue is +40% compared to the same period, mainly due to Sporz's business combined contribution. Excluding Sbos and merging, the year-on-year decline of ~ 20% is mainly due to the difference in revenue calculation of management fees last year. Q3 The gross margin of the main brands is expected to be basically the same year over year. In addition, the number of customers in street stores declined markedly in a weak consumer market. The company's inefficient store optimization led to a net closure of 101 franchise channels, continued to strengthen its closing efforts (net closure of 93 in Q2), and direct-run stores, mainly shopping centers, remained clean. 2) Group buying: revenue -37% due to increased competition in Q3 high base. Under the strategy of increasing price competition in the group buying business, Q3 gross margin was -4 pct to 50.3%. 3) Other brands: +110% of Q3 revenue. Excluding Sports' revenue in the first three quarters, the estimated revenue will basically drop 10% year-on-year +is expected to be dragged down mainly by the impact of the 2023Q3 divestment of boys and girls, and the decline in the remaining small brands (OVV & Ince & Select). Furthermore, the promotion under Sportsstrong's store opening led to a net opening of 51 stores.

E-commerce and non-main businesses are dragging down gross profit margins, and sales expenses have increased significantly due to the expansion of direct management. Q3 The decline in gross margin of e-commerce and non-main revenue dragged down the company's gross margin of -1.1 pct, and the sales expense ratio was +5.8 pct to 24.8%, mainly due to the increase in fixed cost investment in opening direct stores. The R&D expense ratio of +1.0 pct was mainly due to the completion of the current R&D center project. In summary, the company's Q3 net profit margin was -10.7pct year-on-year to 7.0%.

Outlook: The multi-curve layout promotes steady growth in future performance, and is still a high-quality target for dividends. It is expected that the drag on future performance from weak offline retail of major brands will gradually be digested. Under the orderly layout of multi-curve growth and superimposed incremental business, future performance is expected to grow steadily. In addition, the company has high free cash flow, strong performance stability, high book capital surplus, large undistributed profit multiples, and continuous and excellent dividend capacity. The dividend ratio is expected to maintain around 90% in recent years. The company's net profit for 2024-2026 is estimated to be 2.23/2.54/3.05 billion, -25%/+14%/+20% year-on-year, corresponding PE is 13/12/10X, 2024 dividend rate ~ 7%, maintaining a “buy” rating.

Risk warning

1. Changes in the terminal retail environment;

2. Brand inventory removal falls short of expectations;

3. Macroeconomic changes at home and abroad.