Incident: The company recently released its 2023 annual report, achieving operating income of 1.4 billion yuan/same increase of 8.85%, net profit of 92.42 million yuan/same increase of 254%, net profit of non-homologated income of 138 million yuan/same increase of 173% (up 87% over the same period in 2021). Among them, non-recurring profit and loss were mainly affected by stock fund losses, after deducting the upper limit of non-attributable net profit.

The main brands all improved markedly year on year, and investment losses dragged down performance. 23Q2 Revenue was 628 million yuan/same increase of 20.6%, net profit attributable to parent - 4.8 million yuan, net profit after deducting non-return net profit of 36.46 million yuan/same increase of 166.5%. 1) The main owners' brands all improved markedly year on year: increased brand power+discount control led to increased profitability. 23Q2 Jiumuwang/FUN/ZIOZIA's revenue changed +22.9%/-24%/+67.4%, respectively. Among them, the growth rate of the main brand under the low base of Q2 increased significantly over 23Q1, and Jiumuwang's gross margin increased 9.8 pct/8.1 pct to 68.3% year on year; 2) After the strategic change, Q2 achieved profit for the first time in the off-season: 23 Q2 minus net profit not attributable to the mother, was 36 million yuan. Compared to the same period in '21 Turning a loss into a profit is the first time Q2 has achieved profit in the off-season under brand strategy reform, but it is still lower than 42.39 million yuan in 2019. We think it may be that the fall and winter of '22 used products continued to lead to increased inventory price reductions, advertising, and store upgrades reported in Q2. 3) Investment drags down report performance: 23Q2 net profit to parent - 5 million yuan. Of these, profit and loss from changes in fair value were mainly due to stock fund losses of 51.88 million yuan (Q1 impact - 31.57 million yuan).

Focus on the main brand and implement the brand strategy of men's pants experts, and continue to promote the rejuvenation of the brand's product channels. 2023H1 Jiumuwang/FUN/ZIOZIA's revenue was 1,248/0.70/58 billion yuan respectively, with year-on-year changes of +12.6%/-32.4%/+9.4%, respectively. Among them, the main brand Jiumuwang's post-epidemic recovery trend was positive, and gross margin continued to rise to 63.9%, ahead of peers. (1) On the brand side, the Jiumuwang brand first landed at Milan Fashion Week and released a new series of pants shows inspired by “Shengshi Zhonghua” and “A Thousand Mile Country Map” respectively, showcasing the results of the Jiumuwang brand's transformation into specialization, internationalization, and fashion. (2) On the product side, we continue to strengthen research and development of products, fabrics, and patterns to promote the rejuvenation of product styles; continue to develop and innovate pants types, and successfully launch popular products such as black pants and easy pants. In 2022, men's pants accounted for 46% of sales, and the mention rate of men's pants increased from 6% before the change to 22%. (3) In terms of channels, ① Business format transformation: breaking through high-end shopping centers such as China Resources Vientiane City and Wanxianghui to enter mainstream Ole shopping malls in the country; ② Store upgrades: Continued construction of ten-generation stores. By the end of June 2023, there were nearly 1,000 newly opened and renovated tenth generation stores, accounting for about 46%, further deepening consumers' interest in Jiumuwang's “men's pants experts”

The perception of images. ③ Opening large stores led to improved store efficiency: Store upgrades and closing inefficient stores led to a steady increase in store efficiency. As of the end of June 23, the average single store area directly managed/affiliated with the Jiumuwang brand was 144/158 square meters, respectively, a significant increase from 129/143 square meters at the end of '22.

Profit forecast and investment advice: The company is the number one leader in men's pants in China. In 2020, it launched a “men's pants expert” strategic reform, focusing on brands, products, and channels. In the past three years, the company has continued to optimize channels. Combined with the repeated influence of the epidemic, the results of the changes have not yet been shown. In '22, it was dragged down by the investment business and experienced its first loss since listing. We believe that the effects of the company's strategic changes are gradually showing. The profitability of the Jiumuwang main brand has increased, and the non-Jiumuwang brand still has minor losses; compounded by the impact of last year's low base, the company is expected to continue to release performance flexibility. Considering that the company's main business is steadily improving, but reporting performance is still being dragged down by investment, we lowered our profit expectations. We expect net profit for 2023-25 to be 2.59/375/483 million yuan, respectively, and PE corresponding to 2023-25 to be 22/15/12 times, respectively, giving it a “buy” rating.

Risk warning: Risks such as increased competition in the industry, channel adjustment plans falling short of expectations, inventory backlog, etc.