Key points of investment

The company released its 23 annual report and 24 quarterly report:

In 2023, revenue of 3,055 billion yuan (+16.6% YoY), net profit after deducting loss to profit), net profit after deducting loss of 241 million yuan (YoY +302%); 24Q1 achieved revenue of 940 million yuan (+21.7% YoY), net profit attributable to mother of 108 million yuan (+11.3% YoY), net profit not attributable to mother of 199 million yuan (+95.4% YoY). Non-recurring losses were mainly due to changes in the fair value of financial assets held by the company.

Revenue split: Continued to expand, and the growth rate of direct retail sales was faster than that of franchised delivery brands: main brand revenue of 2.75 billion yuan in 23 years (+20.0% YoY), sub-brand ZIOZIA/FUN revenue of 1.19/136 million yuan (+20%/-24% year over year), FUN declined significantly, mainly due to continuous channel optimization (direct marketing/franchise stores closed 16/23 to 55/39 during the year).

By channel, franchise/direct management/online revenue in '23 was 13.9/1,17/340 million yuan, +10%/+5% year-on-year. The impressive growth rate of direct management came from continuous store expansion and recovery of store efficiency. The net increase of 73/-80 direct/franchise stores in 23 years was 73/-80 to 642/1555, and the area of direct-managed/franchised stores was +15/+6 square meters to 155/162 square meters year-on-year.

24Q1 split: main brand revenue of 860 million yuan (+24.5% year over year), sub-brand ZIOZIA/FUN revenue of 0.32 billion yuan (+10%/-4% year over year). By channel, franchise/direct management/online revenue was 4.1/4.4/0.7 billion yuan, compared with +9%/+54%/-13%. The reason for the abnormally high direct management growth rate was mainly due to the time gap between shopping mall sales and settlement. Sales in December last year confirmed revenue in Q1.

Increased gross margins, diluted expense ratios, and short-term investment losses significantly dragged down gross profit margins: 23-year gross profit margin of 63.6% (+4.1pp), 24Q1 gross profit margin of 65.0% (+4.4pp year over year). We expect an increase in the share of direct revenue and strict control of terminal retail discounts. Furthermore, part of the year-on-year increase in 24Q1 was due to the company's adjustment of the accounting treatment policy for franchise shelves in May 23.

Expense rate: 23-year sales/management expense ratio 36.6%/7.3% (-0.6/-0.8pp). We expect to benefit from refined marketing investment and natural dilution after revenue growth; 24Q1 sales/management expenses ratio 28.7%/4.8% (-3.6/-5.0pp). We expect this is due to a misalignment of the cost investment pace compared to last year.

Financial investment: Net income from changes in fair value in '23/24Q1 - $1.16/- 105 million yuan, mainly due to fluctuations in the fair value of financial assets held by the company. The company plans to take the opportunity to sell financial assets and return to the main business, and future performance volatility is expected to decrease.

Profit forecasts and investment suggestions:

The company continues to deepen the strategic transformation of “men's pants experts”, and has achieved outstanding results in improving product strength, brand power, and channel power. Under effective discounts and cost control, positive operating leverage is expected to bring high performance flexibility.

The company is expected to achieve revenue of 34.0/39.1/4 billion yuan in 24-26, an increase of 11%/15%/14%; achieve net profit to mother of 3.0/47/62 billion yuan, an increase of 59%/56%/32% year on year, corresponding to PE 19/12/9 times. The company's performance flexibility is remarkable, and the “buy” rating is maintained.

Risk warning: brand marketing results fall short of expectations; ten-generation store efficiency improvements fall short of expectations; fair value fluctuations of financial assets