The company's 1H22 grew steadily in an unfavorable environment, and its performance was slightly lower than we expected. The company announced its 1H22 performance: revenue of 1.398 billion yuan, an increase of 3.2% over the same period last year, and a corresponding net profit of 257 million yuan, down 5.3% from the same period last year. Under the background of repeated local epidemic situation in China, the company's 1H22 revenue still achieved steady growth, mainly due to 1) after some stores of the company's main brand Lilang transferred to consignment operation in 2021, the current revenue was postponed to 1H22 confirmation, and 2) historical out-of-quarter inventory was well digested in 1Q22, which led to rapid revenue growth in the current quarter. The company's 1H22 homing net profit declined slightly compared with the same period last year, mainly due to the fluctuation of gross profit margin and expense rate under the background of 1H22 epidemic fluctuation. The company's 1H22 financial performance shows a certain degree of operational resilience, while channel adjustment and inventory management have achieved certain results, but the impact of short-term epidemic fluctuations makes the company's profits under short-term pressure, performance slightly lower than expected.
Trend of development
Although 1H22 is affected by multiple factors, short-term profitability remains relatively stable. In 2021, some of the company's main brands changed from distribution to consignment mode, and the proportion of light business series with revenue delayed to 1H22 confirmation and lower gross profit margin relative to the main brand increased. At the same time, the price of 1H22 clothing raw materials fluctuated upward, and the company's total gross profit margin decreased to 48.7%. In addition, depreciation and amortization of decoration expenses increased after the opening of the company's headquarters, making the company's 1H22 management expenses increase to 85 million yuan. Under the influence of multiple short-term adverse factors, the net interest rate fell slightly to 18.5% compared with the same period last year, and remained relatively stable as a whole.
Under the background of the epidemic, the adjustment of channel structure is accelerated and the distribution channel is continuously optimized. As of 1H22 Lilang brand, the total number of domestic retail stores was 2627, a net decrease of 106compared with the beginning of 2022. In view of the repeated concentrated effects of the epidemic in East China, the company actively adjusted the closure of inefficient stores to improve channel operation efficiency. The company plans to open about 100 net stores in 2022, which is little different from that expected at the beginning of the year (50,150 stores). We believe that the future channel end of the company will adhere to a sound and pragmatic store opening strategy, focusing on the core shopping mall stores, and steadily improve the original sinking market channel pattern of high-line cities.
The promotion of quick reaction ability is strengthened, and the out-of-season inventory digestion effect is good. Thanks to the company's 1H22 through the annual promotion, interest in e-commerce platform live goods and other ways to actively digest out-of-season inventory, 1H22 inventory also decreased 7.6% to 826 million yuan. On the other hand, with the gradual expansion of the proportion of the main series of consignment channels and the increase of the proportion of fast counter-orders, the flexibility of dealer inventory is enhanced and the demand for large quantities of stock in the short term is reduced.
Profit forecast and valuation
We consider that there is a large gap in market expectations between the beginning of the year and the actual epidemic background, and at the same time, the company's intensive cultivation of the high-end men's wear market and the improvement of channel operation efficiency will promote profitability in the future. We respectively cut the company's profit forecast for 2022max in 23 years by 11%, 13% to 6.14,727 million yuan, and the current stock price corresponds to 6.5x and 5.4x Pmax E in 202223, maintaining the "outperform industry" rating. Taking into account the company's current valuation level and the expected return to flexibility in future performance, the target price will be maintained at HK $4.85, corresponding to the company's 2022max, 8.1x and 6.8x Pmax E in 23, which has 26.0% upside compared to the current share price.
Risk.
Light business product style switching is not smooth, sales performance is lower than expected, labor and raw material price fluctuations and so on.