Description of the event

2024Q1, the company's revenue was +4.8% YoY to $1.35 billion, net profit attributable to mother -2.1% YoY to $250 million, and net profit without return to mother +6.9% YoY to $230 million.

Incident comments

Revenue: Direct sales are expected to perform steadily under the influence of high base numbers combined with temperature. Franchising will benefit from channel inventory replenishment driven growth, while group purchases will continue to grow well under the optimization of the industry pattern and the strengthening of the company's customer expansion. E-commerce is expected to be affected by controlled discounts and careful preparation of old products, and performance is expected to remain weak.

Profitability: The overall gross margin was +1.7pct to 67.8% year-on-year, the best in the same period since listing, confirming a steady improvement in brand strength and operating power. It is expected mainly due to excellent inventory structure & controlled discounts. The cost rate for the period was +0.7 pct year over year, mainly due to the fact that the sales expense ratio was +1.4 pct year over year under the normalization of marketing activities, and the financial expense ratio of -0.7 pct year over year was mainly driven by an increase in interest income from bank time deposits. Net profit/operating income to mother after deducting other income was +1pct to 17% year over year. Therefore, net income to mother of -1.3 pct year over year was mainly due to a decrease in other income, mainly government subsidies. The better performance of non-net profit deducted from the mother was also due to the impact of government subsidies.

Operating capacity: The company's inventory continued to decline by -1% YoY and -7% month-on-month, and the net business cycle was shortened to the best in the past 10 years. Good asset quality laid the foundation for steady and healthy development in the future. Net operating cash flow of -88% over the same period was mainly due to increases in product purchases paid by the company, employee bonuses, and taxes in the previous year.

Looking ahead: Retail growth improved slightly month-on-month in April due to the influence of high base numbers compounded by reduced public holidays. A lower base in May and longer holiday spending time are expected to positively catalyze retail, and Q2 is expected to improve month-on-month. Under weak retail expectations, the company returned to the bottom of its historical valuation. The growth logic did not change, and the valuation & dividend ratio were cost-effective. The company's net profit for 2024-2026 is expected to be 8.0, 9.1, and 1.04 billion yuan, and PE is 11, 9, and 8X. Maintaining a “buy” rating, the bottom layout is recommended.

Risk warning

1. Changes in the terminal retail environment;

2. Brand inventory removal falls short of expectations;

3. Macroeconomic changes at home and abroad.