The company released its 2022 annual report: revenue of 2,341 million yuan/yoy -0.06%, net profit of 15 million yuan/yoy -80.46%. Revenue declined slightly due to the impact of the epidemic. The sharp decline in profit was mainly due to increased publicity and consulting expenses under the high-end transformation. On a quarterly basis, 22Q1-Q4 revenue was +10.92%/+6.55%/-7.67%/-6.83%, respectively, and the net profit returned to the mother was -41.03%/-10.71%/small loss/large losses, respectively. Q3 and Q4 operations were severely impacted by the epidemic, and the Q4 loss margin deepened mainly due to increased investment in sales expenses.
The main clothing industry is relatively stable, and the growth rate of direct management is impressive under the strategic transformation. 1) By product, the revenue for clothes/printing/dyeing/fabric in '22 was +4.6%/-42.8%/+16.5%, respectively, accounting for 87.2%/2.7%/5.6%, respectively.
The main clothing industry performed steadily during the pandemic. Among them, the Hongdou brand menswear/OEM processing revenue was -15.1%/75.8% year-on-year, accounting for 63.7%/36.3% of clothing revenue, respectively. 2) Looking at the clothing business by channel, online/offline revenue in '22 was +9.9%/+2.8% year-on-year, accounting for 26.0%/74.0% of clothing revenue, respectively. Online channels were relatively less affected by the epidemic and grew faster. Offline direct operation/franchising/other (mainly OEM processing, brand group purchases, etc.) revenue was +54.0%/-46.9%/+12.7%, respectively, accounting for 13.6%/29.7%/32.0% respectively. At the end of '22, there were 922 stores (399 directly managed plus 523 franchisees), net -79 compared to the end of '21 (direct management-7 & franchise-72), corresponding to -7.9% (direct management -1.7% & franchise -12.1%). The growth rate of direct sales channels was mainly driven by the upgrading of high-end branding strategies. Increased store efficiency, year-on-year + 50% or more.
Under the high-end transformation, gross margin increased, and the sharp increase in expense ratios dragged down the decline in net interest rates. 1) Gross profit margin:
The year-on-year ratio of +3.13pct to 34.07% in '22 was mainly driven by the gross margin of men's clothing of the Red Bean brand +12.8pct to 50.9% year on year. The results of the brand transformation are beginning to show. 2) Expense rate for the period: +7.69pct to 36.32% year-on-year in '22, of which the sales/management/R&D/finance expenses ratio was +8.04/-0.52/+0.36/-0.19pct to 26.52%/8.28%/0.92%/0.61%, respectively. The sharp increase in sales expenses was mainly due to the increase in advertising expenses and consulting fees for transformation and upgrading. 3) Net interest rate to the mother: The increase in the fee rate was greater than the gross profit margin, and the net interest rate to the mother was -2.64 pct to 0.64% year-on-year. 4) Inventory: Inventory at the end of '22 was 152 million yuan/yoy +34.04%. The number of inventory turnover days was +5 to 31 days compared to the same period. The inventory scale increased due to the disturbance of the epidemic.
5) Cash flow: Net cash flow from operating activities in '22 was 107 million, a significant increase over the previous year. As of the end of '22, the monetary capital was 963 million yuan, and there was plenty of cash.
Position classic and comfortable menswear and carry out a comprehensive high-end strategic transformation of the brand. The company collaborated with Junzhi in '21 to position classic and comfortable menswear, and the results of the brand upgrade are beginning to show: ① the channel accelerated the transformation from traffic operation to brand operation, deepened the operation of private mini-programs, and achieved GMV3.1 billion yuan in the Hongdou menswear applet in '22; ② the product created a popular item with zero sense of comfort, with single product sales exceeding 330,000 pieces in '22.
On 2023/1/16, the company announced that it plans to raise 1.18 billion yuan to carry out projects such as store upgrading, e-commerce center construction, design and development center construction, etc., demonstrating confidence in development and providing sufficient financial guarantees for the continuation of subsequent reforms. The effects of the brand upgrade will be further tested by the market.
Profit prediction and investment rating: The company focuses on the menswear business. Since the transformation in '21, the company has continuously launched high-quality products & continued channel upgrades. Results began to show in '22. The efficiency and overall gross margin of direct-managed stores increased dramatically, but the investment of expenses during the transition period generally put pressure on profits in '22. At the same time, the company invigorated the business wear market and broadened its scope of business. Over the past 23 years, it has successively won bids for China Construction Bank, China Energy Group, etc., with a cumulative project amount of about 505 million yuan. In terms of the new energy business, new energy wind energy, which entered the market in '22, has obtained corresponding construction qualifications, and the solid-state lithium battery business has obtained the 3GW high-power solid-state lithium battery project, but the commencement of construction progress has been delayed due to patent disputes. Considering the large investment during the transition period, we lowered the net profit for 23-24 from 1.11/1.54 to 0.68/100 million yuan, increasing the 25-year forecast value by 133 million yuan. The corresponding 23-25 PE was 111/76/57X, maintaining the “increase in holdings” rating.
Risk warning: The recovery in terminal consumption fell short of expectations, the sharp increase in costs, the effects of brand transformation fell short of expectations, the advancement of the new energy business fell short of expectations, etc.