Net profit for the first half of 2023 increased 16 times year on year, thanks to sales recovery and operating leverage effects: Baosheng's sales in the first half of the year increased 11% year on year, and net profit increased 16 times to RMB 305 million, in line with positive profit forecasts. Gross margin fell 1.9 percentage points to 33.5% in the first half of the year, but rent cost control and operating leverage slightly offset the decline, increasing operating profit margin by 2.2 percentage points to 4.3%. Net profit margin increased by 2.6 percentage points to 2.8% (0.2% in the first half of 2022).
As net cash increased 263% year over year to RMB 1.9 billion, Baosheng paid an interim dividend for the first time since the first half of 2016, with a dividend rate of 30%.
Inventory removal is progressing well, which means there is less pressure on gross margin in the second half of the year: Baosheng removed inventory in the market promotion environment in the first half of the year, resulting in a 1.9 percentage point drop in gross margin (mainly due to the deterioration of the channel mix, while offline retail discounts only worsened slightly under effective control in the first half of the year). As of the first half of 2023, the company's inventory fell 23% month-on-month, close to the 133-day optimization level (compared to over 200 days of inventory in December 2022 and June 2022). Given that the proportion of old inventory that is over a year old is higher than ideal, management expects to gradually clean up this inventory and is expected to resolve this issue by the end of this year. Overall, management expects less pressure on gross margin in the second half of 2023 due to inventory removal, and expects gross margin to improve both month-on-month and year-over-year in the second half of 2023.
Pan-Micro sales continued to rise: In the first half of 2023, Pan-Micro sales increased 56% year-on-year, and the revenue contribution reached a high level of 20.5% in the second quarter. This emerging channel just started in the first half of 2020, currently accounts for more than half of total omnichannel sales (first half of 2023), and since its conversion rate, return rate, and full price sales for the quarter are much better, its gross margin is higher than other online sales (such as e-commerce, B2B). It is anticipated that this continued increase in the share of sales channels will help drive the expansion of gross margin.
Sales in July fell 6% year over year due to bad weather: Regarding the sales outlook for the second half of the year, management expected the low base effect to be a benefit, but on the other hand, sales trends fluctuated and there was no steady improvement. Management is therefore cautiously optimistic, but believes that the second half of the year should show an overall upward trend. In terms of profit margin, management expects the operating margin for the second half of the year to be at the same level as in the second quarter (2.7% in the second quarter).
The target price was fine-tuned to HK$1.46, and purchases continued: Sporting goods market sales were slow in the second half of the year (July sales: Baosheng -6% YoY, Li Ning +medium single digits). We lowered our revenue and profit expectations for 2023-24, thereby lowering Pou Sheng's EPS expectations. However, given factors such as increased asset turnover, improved profit margins brought about by channel portfolios, a healthier balance sheet, and the resumption of dividend payments, we believe there is room for its valuation to rise. We lowered our target price to HK$1.46 (originally HK$1.52), keeping the price-earnings ratio unchanged at 8 times (2024E, the average earnings per share for 2023-24), and a 53% discount from our target price-earnings ratio of 17 times that we gave Taobo. The reasons were that Baosheng stock had low liquidity, small cap discounts, small scale, and weak profit margins.