Revenue and net profit attributable to mother in '23 were +10%, +28%, 24Q1 -12%, and -33% YoY, Dipexo Fashion released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 2,649 billion yuan, a year-on-year increase of 10.35%, net profit of 494 million yuan, a year-on-year increase of 28.31%, deducted non-net profit of 462 million yuan, a year-on-year increase of 20.45%, EPS of 1.04 yuan, and plans to pay a cash dividend of 0.80 yuan (tax included) per share, with a dividend rate of 77%.

The company's profit side grew faster than revenue in '23, mainly due to a 3.15 PCT drop in the expense ratio, and the net profit margin to mother increased by 2.62 PCT to 18.64% year on year. On a quarterly basis (adjusted before caliber), 23Q1-Q4 companies' revenue in a single quarter was +2.27%, +26.50%, -3.28%, and +17.87%, respectively, while net profit to mother was +9.34%, +40.27%, -13.54%, and +777.80%, respectively.

In terms of the first quarterly report, 24Q1 achieved revenue of 537 million yuan, a year-on-year decrease of 11.98%, net profit of 110 million yuan, a year-on-year decrease of 33.03%, after deducting non-net profit of 73.85 million yuan, a year-on-year decrease of 32.33%.

DAZZLE and D'zzit revenue in '23 were +9%, +14%, online/offline revenue +30%, and +8% by brand. The share of DAZZLE, DIAMOND DAZZLE, D'zzit, and RAZZLE revenue in total revenue in '23 (same below) was 54%, 6%, 39%, and 2%, respectively. Revenue was +8.94%, -7.39%, +14.48%, and +56.05%, respectively; 24Q1 revenue was -16.22%, -10.08%, and - 7.17%, +2.32%

By channel, offline and online revenue accounted for 85% and 15%, respectively. Revenue increased 7.68% and 29.47%, respectively. Direct sales and distribution revenue from offline channels accounted for 43% and 41% of total revenue, respectively, and revenue increased 10.55% and 4.83%, respectively. 24Q1 direct management, franchise and online revenue were -20.01%, -3.67%, and -4.74%, respectively.

In terms of offline stores, as of the end of 2023, the total number of the company's offline stores was 1,037 (-7.66%), and the number of directly-managed and distributed stores was 276 (-11.54%) and 761 (-6.17%), respectively. By brand, the number of DAZZLE, DIAMOND DAZZLE, D'zzit, and RAZZLE stores were 541 (-12.18%), 24 (-20.00%), 450 (-2.18%), and 22 (+57.14%), respectively. As of the end of March '24, the total number of stores was 1,014 (-2.22% compared to the beginning of the year), of which the number of DAZZLE, DIAMOND DAZZLE, D'zzit, and Razzle offline stores were -2.22%, flat, -2.67%, and +4.55% compared to the beginning of the year.

The 23-year expense ratio declined to exceed gross profit margin, inventory increased, and net operating cash flow increased gross profit margin: gross margin fell 0.90 PCT to 74.46% year on year. By brand, DAZZLE, DIAMONDDAZLE, d'zzit, and RAZZLE gross margins were 75.19% (-1.11PCT), 80.77% (+0.07PCT), 72.34% (-0.55PCT) and 81.88% (-0.19PCT), respectively. By channel, the gross margins of direct management, franchise, and e-commerce were 79.91% (-1.45PCT), 68.07% (-1.28PCT), and 76.82% (+0.95PCT), respectively. The gross margin of 24Q1 decreased by 1.10PCT to 75.55% year on year, and the gross margin of all brands and channels declined slightly.

Expense rate: The cost rate decreased by 3.15 PCT to 48.64% year on year. Sales, management, R&D, and finance expenses were 40.46% (-3.19PCT), 7.14% (+0.05PCT), 3.16% (+0.18PCT), and -2.10% (-0.20PCT), respectively. The cost ratio increased by 4.21PCT year-on-year during the 24Q1 period. Among them, sales, management, R&D, and finance expense ratios were +1.55, +2.53, +0.27, and -0.13PCT, respectively.

Other financial indicators: 1) Inventory increased 2.75% year on year to 388 million yuan at the end of March '24, up 15.25% from the beginning of the year. Inventory turnover days were 204 days and 286 days in 23 and 24Q1, respectively, -10 days, and +36 days. 2) Accounts receivable increased by 23.23% year on year to 79.18 million yuan at the end of March '24, down 13.22% year on year from the end of March '24. The turnaround days for accounts receivable were 10 days and 12 days for 23 and 24Q1 respectively, the same level and +4 days year-on-year. 3) Net operating cash flow was 703 million yuan in 23 years, up 41.62% year on year; 24Q1 decreased 52.69% year on year.

The 23-year results have begun to recover and the quality of operations has improved. We expect that the company's retail sales will continue to recover steadily in '23, and that the quality of operations will also improve. There is a certain gap in revenue and profit compared to '21, and we look forward to continued recovery. The company's many brands have differentiated positions. In 23 years, the company continued to innovate and iterate the brand's visual image and enhance brand influence. The main brand DAZZLE released a new brand logo MONOGRAM “D”, and the core product, Rubik's Cube Cheongsam, was invited to participate in SHANGHAI GALA. At the same time, the company continues to optimize the marketing network system to improve store location, area and refined operation management. In 23 years, the company has been deeply involved in the original retail training system and strengthened on-site guidance for retail teams. The growth of online channels was driven by new products. GMV surpassed 1 million yuan on the first day of the launch of several series throughout the year, and with the help of content channels and Douyin, the revenue growth rate of content channels and Douyin nearly doubled. In the second half of the year, all core online channels were connected to brand membership channels to enhance the user experience.

In 24, the company will continue to enhance its product strength and brand power, and plans to integrate d'zzit's omnichannel retail division to accelerate the integration of online and offline resources, promote growth and improve operational efficiency, and continue to increase investment in informatization and digital intelligence construction.

Considering the uncertainty of terminal demand, we lowered the company's 24-25 profit forecast (net profit reduced by 26%/29% from the previous profit forecast, respectively) and added a 26-year profit forecast, corresponding to the 24-26 EPS of 1.09, 1.19, and 1.31 yuan, respectively, and the 24-25 PE was 12 times and 11 times, respectively. The company had undervalued and high dividend attributes. The company's average dividend rate for 2021-2023 was 6.64% (calculated based on the closing price on April 26), maintaining the “buy” rating.

Risk warning: Consumption recovery falls short of expectations, inventory backlog; industry competition intensifies; cost control is inadequate; progress in brand development falls short of expectations.