The company's 1H23 performance increased year on year, revenue/net profit +9%/+173% year on year, 2Q23 revenue +21% year on year, after deducting non-net profit, turning loss into profit year over year. By brand, Jiumuwang benefited from brand upgrades and channel structure optimization. Revenue increased 12% year on year, while gross margin increased 3.2 pcts year on year, and performance and profitability improved markedly. The company 1H23 continues to adhere to the three aspects of product innovation, brand building, and channel optimization. We expect the company's brand, product, and channel strategies to be further deepened in the second half of the year, performance is expected to continue to recover, and maintain a “buy” rating.

The results of the brand upgrade were evident, and revenue recovered year over year. 1) Revenue and profit: 1H23 achieved revenue of 1.4 billion yuan/ +8.85%, mainly due to a significant year-on-year improvement in the company's performance in the second quarter. Net profit attributable to mother was 92 million yuan, turning loss into profit year on year. After deducting non-attributable net profit of 138 million yuan/ +173%, non-recurring profit and loss reached 50 million yuan, mainly due to changes in the fair value of the company's financial assets. Among them, 2Q23 revenue was 628 million yuan/ +21%, net profit not attributable to parents was 36 million yuan (loss of 50 million yuan in 2Q22). 2) Costs and expenses: 1H23 gross margin increased by 2.99pcts to 63.68%, of which the gross margin of men's pants increased by 3.2pcts to 66.8%. The company's sales expenses ratio improved significantly year-on-year. 1H23's sales/management/R&D expenses ratio was 34.4%/9.1%/1.6%, year-on-year -6.3/+0.9/-0.2 pcts. In addition, 1H23's investment income was 8.46 million yuan (1H22's investment income was -4.13 million yuan). 3) Cash and turnover: 1H23 inventory turnover days year over year -23 days to 286 days, net inventory value -5% year over year to 780 million yuan, net operating cash flow increased 1722% year over year to 238 million yuan.

As of 1H23, the company's book cash balance was 1.01 billion yuan, and transactional financial assets were 640 million yuan.

Stores continue to be optimized, and gross margin across channels has improved markedly. By brand, 1) Jiumuwang: revenue reached 1.25 billion yuan/ +13%, gross margin reached 63.8% /+3.8pcts. As of 1H23, the number of direct-managed/franchise stores was 574/1,586 respectively, with a net change of +5/-39 (24/50 new stores opened, 19/89 closed), and the scale of channel adjustments narrowed year-on-year. 2) FUN: Revenue reached 70 million yuan/ -32%, gross margin reached 62.6% /-7.9 pcts.

As of 1H23, the number of direct-managed/franchise stores was 64/55, respectively, a net decrease of 7/7 (1/3 new stores opened, 8/10 closed). 3) ZIOZIA: Revenue reached 60 million yuan/ +9%, gross margin reached 76.7% /+3.9 pcts. As of 1H23, the number of direct-managed/franchise stores was 99/2, respectively, a net decrease of 6/0 (7/0 new stores opened, 13/0 closed). By channel, online/offline revenue was 17/1.22 billion yuan, up 15.2%/8.3% year on year, gross margin was 64.7%/64.5%, respectively, up 0.6/3.3 pcts year on year. In the offline segment, the revenue of direct-run stores/franchise stores was 56/590 million yuan, +14.5%/+4.3% year-on-year, and gross margin was 71.1%/60.1%, an increase of 3.0/+3.3 pcts over the previous year.

Product innovation and brand building continue to gain strength, and channel optimization has been further improved. The company is positioned as an expert in men's pants to build competitiveness in all aspects. On the product side, the company combines high-quality international fabric resources to continuously create differentiated products and consolidate the advantages of men's pants categories. The company launched “Easy Pants” which are both practical and functional in February, and “Business Outdoor Pants No. 1” for outdoor men's pants in the business sector in April, continuously enriching the product matrix of men's pants on the product side. On the channel side, the company continues to optimize offline retail channels, focus on mainstream channels, further break through high-potential channels such as Vientiane City and the Longhu system, and continues to build ten-generation stores (currently has nearly 1,000 stores). In third- and fourth-tier cities, it has combined activities such as new store openings, new product shows, and themed pop-ups to enhance its influence. Currently, it has successfully hosted urban explosion events in many places. On the brand side, the company continues to strengthen its brand power building, strengthen brand culture dissemination through participation in variety recording, celebrity promotion, KOL cultivation, and teaming up with video celebrities to enhance brand potential.

Risk factors: Risks such as new product sales falling short of expectations, the pace of store closures exceeding expectations, e-commerce sales falling short of expectations, new brand growth falling short of expectations, and falling terminal demand.

Profit Forecast, Valuation and Rating: Considering that the company's performance continues to recover after the pandemic, we maintain the 2023-2025 EPS forecast of 0.47/0.70/0.83 yuan. Referring to comparable company's 2024 valuation (16 times PE compared to Inleffin, 14 times PE in seven wolves, wind unanimously expected), combined with the company's historical valuation center about 19 times PE, and Bosideng's post-transformation growth center, 21 times PE, maintained the company's 2024 PE 19 times PE, target price 13 yuan, and maintained a “buy” rating.