The company's main brand has developed steadily, and over the years of operation, it has accumulated good channel management capabilities, laying the foundation for expanding retail businesses such as Sportz. 1) The HLA brand is a leading popular menswear brand. It insists on focusing on core categories and improving product quality. In recent years, it has created a series of products such as technological functions, fashion IP, quality and environmental protection. Our superior cost performance ratio has been welcomed by the consumer market. We judge that the 2024Q1-Q3 brand revenue is -5% to 11.3 billion yuan/gross margin increased by 0.9 pct to 45.3% year over year. 2) The number of HLA brand stores reached 5872 at the end of 2024Q3, including 1,379 direct-run stores and 4493 franchisees operating under the direct management model. We judged that the number of stores was leading the industry (VS retailer Taobo FY2025H1/Baosheng 2024H1 had 5813/3478 direct stores at the end of each), and had rich experience in channel retail operations, which is expected to help the company expand its brand management business and establish competitiveness.

Since 2024, new businesses such as JD Olay have progressed smoothly, and the medium- to long-term growth logic is clear. 1) Currently, the company holds 51% of SPOTS's shares through Shanghai Hailan, and will be included in the scope of the company's consolidated statement in 2024H1. The SPOTS subsidiary's revenue for May-June 2024 was 0.14 billion yuan. 2) The company carries out the JD Olay business, mainly selling multi-brand discount products, including the opening of offline “JD Olay” stores and the online “JD Ole Official Flagship Store”, covering categories including outdoor sports footwear, men's clothing, footwear, luxury, cosmetics, etc., backed by the trust of the JD platform among mass consumers, to the market. The business development is in line with consumer trends.

We estimate new business development space for brand management: medium- to long-term revenue prospects of 10 billion dollars. The actual situation depends on the growth rate of store openings, and profit performance needs to be continuously tracked. Assuming that all revenue from consignment products is included in the statement, the net interest rate assumes that the net interest rate mainly refers to the situation of intercompany companies:

1. Offline JD Olay business: The first JD Olay offline store “(Wuxi Hailan Pegasus Shuicheng Store) opened in September 2024. Judging from the pace of business development, the number of stores is expected to increase to about 10 before the Spring Festival in 2025, and it is estimated that it is progressing smoothly. ① Number of stores: The same company “TJX” (leading domestic discount clothing and home fashion retailer) currently has more than 4,900 stores worldwide. We judge that the company JD Olay may expand its stores to hundreds in the medium to long term. We recommend focusing on tracking store expansion plans and implementation. ② Store efficiency: Considering the sales characteristics of the Olay business format, we judge that its store area/customer unit price/store efficiency is generally significantly higher than that of regular price stores. ③ Profit: The net sales margin of the same company TJX is mostly 7% to 9%. Considering that the company's JD Olay business rent is mainly based on the deduction model, we judge the business profit margin or leading industry level in a mature state.

2. Online JD Olay business: We determine that the current operation of online JD Olay stores is still being tested. It is expected that 2025H1 inventory etc. will be officially opened with offline, and subsequent business progress will need to be continuously tracked.

3. Offline Adidas retail project: Considering the mature development of the Adidas brand, we judge that the company's retail project is rapidly expanding and smoothly. ① Number of stores: We estimate that 300 to 400 new stores will be opened in 2025, and the number of stores is estimated to be around 800 by the end of 2025. ② Store efficiency: We judge that the current store efficiency of the new store is still climbing, and it is expected to improve steadily in the future. ③ Profit: The net interest rate of Taobo, a retail company in the sports industry chain, is mostly 6% to 10%.

Industry level: The discounted consumer market shows a preference for branded discounted products, bringing room for continued growth in the Olay business. 1) In the past, against the backdrop of fluctuations in the retail environment, my Olai business has maintained a strong growth momentum. According to estimated data from the Zechia Statistics Bureau and the China Discount Department Store Business Association, retail sales of units above the discount limit were +7.2% in 2023, with retail sales in the outlet channel +9.5% year-on-year, which is better than the online retail sales performance of supermarkets, brand stores, convenience stores, department stores and physical products during the same period. 2) I started Olai late. Currently, it has only been developing for more than 20 years, and is currently still in the growth stage. According to the forecast of the China Discount Department Store Business Association, it is estimated that the mid-year discount outlet market size will be about 230 billion yuan in 2023, and it is predicted to reach 260 billion yuan by 2025, with a CAGR of about 6.3%, which is expected to continue to show good and steady growth.

Demand side: Consumer attitudes are also gradually becoming rational, and they are pursuing cost-effective products and channels while having brand awareness. We believe that the characteristics of the current discounted consumer environment are expected to help Olay's business continue to grow in the medium to long term: 1) After decades of market education, consumers have a certain awareness of foreign and foreign brands; 2) while the middle income group accounts for more, the growth rate of residents' purchasing power is slowing or declining, driving more rational consumer behavior decisions, such as pursuing cost-effective products and channels; 2) the supply-side development of products and brands is relatively mature.

Supply side: In order to meet market demand, the number of outlet businesses continues to grow. According to statistics from the China Discount Department Store Business Association, there are about 239 outlet projects fully discounted at the end of 2023, of which 17 were newly opened in 2023. We judge that the number is expected to continue to increase in the future, providing consumers with a wealth of choices.

The company's performance in 2024 is under short-term pressure, and healthy growth is expected to resume in 2025. 1) The company's revenue for 2024Q1-Q3 was 15.26 billion yuan, -2% year over year; performance was 1.91 billion yuan, -22% year over year; after deducting non-performance, it was 1.75 billion yuan, -21% year over year. We determine that the decline in profit quality is mainly due to an increase in the sales expense ratio. The overall estimate is that the company's revenue was basically stable year-on-year and profit declined year-on-year for the full year of 2024. 2) Looking forward to 2025: We expect steady operation of the main brand and restoration of profit quality in 2025. Strong brand management business is expected to drive strong revenue growth for other brands.

By business: 1) Main brand: Revenue from 2024Q1 to Q3 was -5% to 11.3 billion yuan. Short-term offline operations were affected by fluctuations in the consumption environment/e-commerce estimates will maintain steady growth. It is expected that 2025 will be dominated by stable operation as a whole. 2) Group purchasing: Revenue from 2024Q1 to Q3 was -14% to 1.46 billion yuan. We estimate that quarterly growth fluctuations were mainly due to the impact of the pace of delivery and revenue confirmation. The estimated revenue performance of the group buying business for the full year of 2024 was relatively steady. 3) Other brands:

Revenue from 2024Q1-Q3 was +20% year-on-year to 1.76 billion yuan. Among them, the rapid growth in Q3 was mainly influenced by SPOTS, which is expected to grow rapidly in the future.

Operating conditions are healthy, and there is room for future improvements in cash flow management. 1) In terms of inventory, the number of inventory turnover days for 2024Q1-Q3 companies was +71.4 days to 346.1 days, and the inventory at the end of the period was +53.5% to 12.33 billion yuan. Based on business changes, we determined that the increase in inventory was mainly due to the consolidation of the SPOTS business. It is estimated that the main business inventory remains healthy and controllable. 2) Cash flow: The net operating cash flow from 2024Q1 to Q3 was 0.03 billion yuan. We judge that it is mainly due to the company's peak stocking season, and it is estimated that there is room for improvement in the future.

Investment advice. The main brand of the company is popular menswear. In recent years, it has expanded its brand management business and opened up room for growth. At the same time, high dividends are attractive (dividend payment rates of 85% + from 2021 to 2023).

We have slightly adjusted our profit forecast. We expect net profit to be 2.21/2.7/2.98 billion yuan from 2024 to 2026, which is 13 times PE in 2025. Considering current changes in the company's new business, it is expected to open up medium- to long-term growth space and adjust the rating to a “buy” rating.

Risk warning: Fluctuating downstream consumer demand; main brand innovation results and terminal performance fall short of expectations; new business and new brand development fall short of expectations; risk of measurement errors.