The company's recent situation

Heilan Home announced that its JD Olai stores in Tengzhou, Shandong and Anyang, Henan will officially open for trial operation on December 28, 2024, and are expected to officially open on January 1, 2025. The company's offline discount retail business segment has officially begun to expand.

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The first store at the Jiangyin headquarters opened and operated smoothly at the end of September, and Hailan officially accelerated the expansion of the JD Olay store. In July 2024, Hai Lan signed an agreement with JD to establish a subsidiary of Jinghai Olay (Heilan Home indirectly holds 65% shares) to simultaneously promote the online “JD Olay Official Flagship Store” and the JD Olay offline store business. The first store opened on September 25, 2024 in Jiangyin, the headquarters of Heilan. The store covers an area of about 3,000 square meters and operates 50-60 luxury, sports, and beauty brands, including Gucci, Balenciaga, Nike, and Aquamarine Mysteries. Since opening 3 months ago, store operations have gradually matured, and Hai Lan has begun to accelerate store expansion outside the headquarters.

Hai Lan still uses an asset-light model, and the location selection is differentiated; innovative business leaders operate a rich discount retail business. In JD Olay's operating model, Hai Lan also uses a consignment sales model, collecting 40% of revenue and paying a certain deduction fee from JD, while also bearing store rent and staff wages. The profit margin of this business model can be better guaranteed. Compared to the current mature Ole business format, Hai Lan did not choose a location on the outskirts of the city, but instead chose a central location in the city center of third- and fourth-tier cities, and cooperated with leading shopping malls such as Wanda and China Resources to create a new business model called Olay in the city. On the issue of supply, which is very important in the Ole business format, the innovative business leader of Heilan's Jingdong Olai business (holding 35% of the shares in the Jinghai Olay subsidiary) has many years of experience in omni-channel retail discount operations. We estimate that its leading online final goods sales business will have revenue/profit of 800 million yuan/85 million yuan in 2023, and 1-3Q24 revenue/profit of about 0.96 billion yuan/0.15 billion yuan, showing strong operating capacity. We expect JD Olay's offline stores to reach 10 before the Spring Festival in '25, and will enter a relatively rapid development trajectory in '25. Looking at the medium to long term, since the discount retail business is still in its infancy and developing rapidly in China, we believe that this segment of business is expected to become an important growth engine for the company.

The main clothing industry remains relatively stable, while maintaining a high percentage of dividends. The overall business in the menswear sector remains relatively stable. We believe that the company still has an advantage over competitors in terms of cost performance and scale. Recently, the company has cooperated with positive stars/media, including Olympic champions and CCTV News, to continue to maintain brand exposure. At the same time, the company still maintains a high dividend ratio, which has become a strong safety cushion for valuation.

Profit forecasting and valuation

We maintain 2024/25 net profit of 2.258/2.713 billion yuan, and the current stock price corresponding to 2024/25 P/E is 14.1x/11.7x, respectively. Maintaining an outperforming industry rating, considering the long-term growth of JD Olay's business and the company's high dividend characteristics, the target price was raised by 12.2% to 7.91 yuan, corresponding to the 2024/25 P/E to 16.8x/14.0x, respectively, with 19% upside compared to the current stock price.

risks

Terminal demand falls short of expectations, cost control falls short of expectations, and risk of inventory impairment.