Key points of investment:
Private brands and agency brands are developing in parallel, and private brands contribute more than 60% of the company's profits. Through continuous accumulation and deepening of brand assets, the company's own brands have now initially formed a brand matrix covering multiple levels of luxury, middle class, national trend and mass. Its own brands mainly include Unmashifang, Yifidan, Big Water Drop, and Little Confused brands. Currently, the brands that mainly contribute to the source of profit are Ephidan and Imperial Clay Shop, and Little Muddy has contributed less to profits. French high-end skincare brand EDB focuses on providing excellent anti-aging solutions for sensitive skin. Looking at Ifidan's overall revenue, in 2023, Ifidan achieved operating income of 285 million yuan, +199.2%, achieved net profit of 73 million yuan, +205.3%, and increased net interest rate by 0.2 pct to 25.7%.
Big Water Drop's growth rate in 2023 was impressive. The Douyin channel's GMV reached 157 million yuan, an increase of 107% over the previous year; the JD channel's GMV was 44.62 million yuan, an increase of 304% over the previous year.
The share of revenue of brands with high positioning, high customer unit prices, and high gross margins continues to rise, while the share of revenue of popular brands with low gross profit is gradually declining. In recent years, the company's gross margin has continued to rise, rising after bottoming out in 2020. In 2023, the company's gross margin was +5.32pct to 58.44%. Mainly, the share of high-margin brands in the agency business continued to rise, and the product structure was further optimized. Since 2019, the company's net interest rate has shown a volatile upward trend. In 2023, the company's net interest rate was +4.05pct to 6.65%, and the profit inflection point was gradually realized.
The Water Sheep brand invigorates technology with unique ingredients and rare plant forms, and is deeply rooted in Chinese specialty ingredients.
The company focuses on innovative research on traditional materials such as black ginseng extract, secondary fermented Ganoderma lucidum herb enzymes, tea extract, etc. At the same time, it has also made significant progress in research and development of new technologies and raw materials such as Yili water mica, tetrahydropyrimidine, and retinol. At present, the company has successfully achieved independent control of various raw materials, injecting strong innovation impetus into the company's development.
Equity incentives bind core backbone and stimulate enthusiasm. In July 2023, the company announced an equity incentive plan. The incentive plan is to grant incentives to no more than 345 people, including company directors, executives, and other core employees of the company (including subsidiaries). The company-level performance assessments corresponding to the restricted stock ownership to be granted under this incentive plan are net profit of not less than 300 million yuan in 2023 and net profit of not less than 400 million yuan in 2024.
Valuation and investment suggestions: We expect the company's revenue to be 49.43/54.00/5.862 billion yuan respectively in 2024-2026, up 10.01%/9.24%/8.56% year on year; in 2024-2026, the company's net profit to mother will be 396/4.81/551 million yuan, respectively, up 34.61%/21.58%/14.51% year on year. The current market value corresponding to 2024-2026 PE is 19/16/14 times, respectively. Referring to the same expectations as Huashun iFind, the average PE value of the comparable company in 2024 was 28.5 times. Referring to the average valuation situation of comparable companies, it covered the “buy” rating for the first time.
Risk warning: industry competition risk; macroeconomic fluctuation risk; investment risk.