Revenue increased 9% in the first half of 2023, and business performance improved markedly in the second quarter. The company is the leading brand in the men's pants segment on the racetrack. Revenue increased 9% to 1.4 billion yuan in the first half of 2023. Revenue growth was mainly driven by a 15% increase in direct management and online operations. As franchisees handled inventory, franchise revenue only increased slightly. Gross margin increased by 3 percentage points to 63.7%, mainly due to the narrowing of retail discount rates across channels and the increase in the share of direct sales. The decline in the number of stores and the reduction in promotional expenses led to a slight decrease in operating expenses over the same period last year. Net profit for the first half of the year was 190 million yuan (turning loss into profit), net profit after deducting non-net profit, an increase of 173% to 140 million yuan. As of June 30, inventory value decreased 5% year over year, and inventory turnover days were 286 days.

In the second quarter alone, the company achieved a 21% year-on-year increase in revenue, of which direct revenue increased by 51% and e-commerce grew by 26%. Compared with Q1, there was a significant acceleration. Even compared to 2021, it achieved relatively rapid growth compared to 2021. At the same time, Q2 gross margin increased year-on-year, and gross margin increased to 67.6%.

Create popular men's pants in multiple situations, launch 10th generation 2.0 stores, and promote brand potential. In the first half of the year, the company continued to focus on men's pants expert positioning. In line with the brand upgrade strategy, channels and products were further optimized.

1) On the product side, after “Little Black Pants” had a good reputation, “Easy Pants” was launched in February of this year. It uses high-stretch fabrics to enhance comfort and is cost-effective, and has sold over 100,000 pieces. The “Business Outdoor No. 1 Pants,” which was launched in April this year, uses innovative three-proof fabric technology to balance business and outdoor wear scenarios, and has had impressive sales performance. 2) On the channel side, Shidai Store 2.0 was further launched on the basis of Shidai Store. Compared with 1.0 stores, 2.0 focuses more on segmented display and matching of clothing scenarios, which is conducive to enhancing brand image, store traffic, and retention rate. Currently, there are nearly 1000 ten generation stores, accounting for 40%.

Risk warning: The epidemic is repeated, strategic transformation falls short of expectations, brand image damage, and systemic risks.

Investment suggestions: Business performance improved markedly in the first half of the year, and in the future, focus on growth opportunities to increase brand potential.

In recent years, the company has focused on core categories, used mass media and international fashion weeks to boost brand tone and exposure, and invested in transformation and upgrading channels. The brand's professional image and influence have been greatly enhanced. In terms of products, it has transitioned from traditional business pants to a comfortable category with greater potential for growth, and has successively launched popular products such as small black pants, easy pants, and business outdoor pants No. 1. As the business environment picked up after the epidemic, sales growth and profit margins were good in the first half of the year. Focus on the growth opportunities brought about by increased brand potential in the medium to long term. As losses from changes in fair value in the first half of the year exceeded expectations and profit forecasts were lowered, net profit for 2023-2025 is expected to be 2.1/36/430 million yuan (originally 2.9/39/46 million yuan), a year-on-year increase of 327%/69%/19%. As a result, the target price was slightly lowered to 11.2-11.8 yuan (previously 12.1-13.5 yuan), corresponding to PE18-19x in 2024, maintaining the “increase in holdings” rating.