The company announced its 2023 mid-year report: 23H1 revenue of 1,401 billion yuan/yoy +8.85% /up 0.31% from 21H1, net profit of 92.42 million yuan/year-on-year reversal of loss/down 24.51% from 21H1, net profit of 138 million yuan/yoy +173.34% /up 87% from 21H1. Revenue has returned to the same period in '21; profit levels have improved markedly, mainly due to an increase in gross margin and a decrease in the expense ratio; net profit due to the same period in '21 has not yet returned to the same period in '21, mainly hampered by changes in fair value. On a quarterly basis, 23Q1/Q2's revenue was 772/628 million yuan, respectively, +0.84%/+20.61%, respectively, compared to the same period in '21, -4.82%/+7.44%. Q2 revenue recovered at an accelerated pace. Net profit was 9722/- 4.8 million yuan, respectively, and -1.77% /loss compared to the same period in '21. Q2 net loss was mainly due to changes in fair value (mainly changes in the value of financial assets) and asset depreciation losses (mainly depreciation) tired.

Channel adjustments and optimization, and improved store efficiency encouraged the main brand and ZIOZIA revenue to resume growth. 1) By brand, 23H1 Jiumuwang/FUN/ZIOZIA's revenue was +12.6%/-32.4%/+9.4%, respectively, and accounted for 90%/5%/4%, respectively. As of 23H1, there were 2170/119/101 stores, respectively, and 58/23/46 at the end of 22H1, compared to 58/23/46 at the end of 22H1, compared to -2.6%/-27.9%/-18.5% over the same period. All three brands have closed stores, mainly due to the optimization of channels and the active closure of inefficient stores under the company's strategic changes. FUN closed stores significantly, dragging down revenue. Sales of the Jiumuwang main brand and ZIOZIA recovered after the pandemic was liberalized (22H1 had a lower base affected by the epidemic), and increased store efficiency led to an increase in revenue (23H1 Jiumuwang stores that have been in business for more than two years with the same period +20% +). 2) By channel, 23H1 online/direct marketing/franchise revenue was +15.2%/+14.5%/+4.3%, respectively, and accounted for 12%/41%/43%, respectively. As of 23H1, there were 737/1,653 direct-managed/franchise stores respectively, 122/8 compared to the end of '22, corresponding to -14.2%/-0.3% compared to the same period. Online sales maintained relatively rapid growth. Driven by improvements in store efficiency, direct management and franchise revenue increased. Driven by improvements in store efficiency, the direct management base was low, and growth was rapid.

Net interest rates improved sharply in the first half of the year, and Q2 declined due to non-financial projects. 1) Gross profit margin: 23H1 was +2.99pct to 63.68%, 23Q1/Q2 was -1.37/+8.64pct to 60.53%/67.55%, respectively. Q2 gross margin increased a lot, mainly due to discounts controlled by the Jiumuwang main brand and ZIOZIA, increased omni-channel gross margin, and increased share of high gross profit direct sales revenue. 2) Expense rate: 23H1 year on year -6.41 pct to 45.36%, of which the sales/management/R&D/financial expense ratio was -6.30/+0.93/-0.16/-0.88pct, respectively, to 34.35%/9.12%/1.63%/0.26%, respectively. The sales cost rate dropped a lot, mainly due to a decrease in expenses related to net closing.

Expense rates for the 23Q1/Q2 period were -2.21/-13 pct, respectively. 3) Non-economic projects: 23H1 fair value change - 83.45 million yuan/year-on-year narrowing (22H1 - 110 million yuan), of which 23Q1/Q2 was -3457/5.188 million yuan respectively (22Q1/Q2 was -165 million yuan/+59.3 million yuan respectively), 23Q2 saw a sharp increase in year-on-year losses; 23H1 asset impairment losses increased significantly; 23H1 asset impairment losses increased by 63.946 million yuan/year-on-year increase (22H1 was 54.32 million yuan), of which 23Q1/Q2 lost 63.95/152 million yuan respectively (22Q1/Q2) (Loss of 918/45.14 million yuan respectively), impairment losses narrowed in 23Q2; looking at the two projects combined, 23H1 non-project losses narrowed year-on-year, but single Q2 losses increased. 4) Net interest rate: 23H1 was +11.26pct to 6.6%, 23Q1/Q2 was +20.09/-0.28pct to 12.59%/-0.76%, respectively. The decline in Q2 was mainly affected by non-economic projects. 5) Inventory: As of 23H1, 783 million yuan/yoy -5.09%, the number of inventory turnover days decreased by 23 days to 295 days year-on-year, and inventory turnover efficiency increased. 6) Cash flow: 23H1 Net cash from operating activities is 240 million yuan/yoy +1722.7%, mainly due to reduced costs and expenses, monetary capital of 1,012 billion yuan, and sufficient capital.

Profit forecasting and investment ratings: The company is the number one leader in men's pants in China. In 2020, the company cooperated with Junzhi Consulting to launch a “men's pants expert” strategic reform. The reforms revolved around brands, products, and channels. 23H1 post-epidemic recovery+strategic changes gradually showed positive results in promoting a positive trend in the main business. Revenue had recovered to the same period in '21, and non-net profit had increased significantly compared to the same period in '21, showing significant improvements in store efficiency and profitability. However, due to losses from changes in fair value, net profit for the first half of the year has yet to return to the same period in Q2 in '21. There is still a loss in profit, and the company plans for the future Reduce the size of financial assets and reduce the disturbance of non-financial projects on performance. Under channel adjustments, the company still closed stores in the first half of the year, but by the end of 23H1, the number of newly opened or reformed ten-generation stores was nearly 1,000 (850 at the end of '22), accounting for more than 45%, a marked increase. It is expected that the upgrade rate of around 400 stores per year will continue in the future, and the effects of strategic changes are expected to continue to increase. Considering the impact of non-recurring profit and loss on net profit, we lowered the gross profit for 23-25 from 2,84/355/435 million yuan to 2.45/3.23/396 million yuan, respectively, corresponding to 23-25 PE to 23/17/14X, maintaining the “increase in weight” rating.

Risk warning: Weak economy and consumption, fluctuating fair value of financial assets, brand transformation falling short of expectations, etc.