Net profit increased by double digits year-on-year in the first half of 2024, and a special dividend was paid for the first time. Baosheng's sales in the first half of the year fell 8.9% year on year to 9.983 billion yuan, but thanks to effective discount control, gross margin and operating profit margin increased 0.7/0.5 percentage points year-on-year to 34.2%/4.8%, respectively. Net profit to mother increased 10.2% year over year to RMB 0.335 billion, and profit margin increased 0.6 percentage points to 3.4% (2.8% in the first half of 2023). Pou Sheng paid an interim dividend of HK$0.02 per share and an initial special dividend of HK$0.02 per share, with a total payout ratio of 63%.

Passenger traffic in high-tier cities is under pressure, and the revenue side's year-on-year performance in the second half of the year is expected to be similar to that of the first half of the year. In the first half of the year, the traffic of Baosheng's physical stores in high-tier cities fell by more than 30% year-on-year. In contrast, passenger traffic in low-tier cities was relatively steady, and the performance of franchisees was stable. At the same time, compared to the middle- and low-end footwear categories, the trend of recovering high-end prices is slower. Passenger traffic in high-tier cities and pressure on high-end products caused Baosheng's same-store sales to drop by about 16.4% in the first half of 2024. Some of this pressure was offset by the integration of physical store networks and increased sales conversion rates. Looking forward to the future, facing pressure from many stores, the company prioritizes stabilizing profits, improving inventory management efficiency and sales efficiency, and speeding up the penetration of low-tier cities.

Discount rate control has brought results, and gross profit margins are expected to stabilize in the second half of the year. The company strictly controlled discounts on various channels in the first half of the year. The overall discount rate improved by a single digit compared to the previous year, and increased gross profit margin. In view of the fact that offline channels are still under pressure in the second half of the year and will reduce the positive impact of continuous discount control, Baosheng will accelerate the optimization of channel ratios and diversify B2C channels, especially pan-micro sales such as WeChat and Douyin (online drainage currently contributes 15.1% to offline sales) to speed up product circulation and maintain a balance between new products and shelf life ratios. Relying on discount control and channel optimization, it is expected to stabilize gross margin performance in the second half of the year.

The target price was lowered to HK$1.01 to maintain the purchase. Due to pressure from both high-tier cities and high-end prices, we lowered our 2024-25 revenue and profit forecasts, thereby lowering our earnings per share forecast.

However, given the improvement in profit margins and the increase in dividend payout ratios, we believe there is room for Baosheng's valuation to rise. The target price was lowered to HK$1.01 (previously HK$1.46), corresponding to the price-earnings ratio of 8 times in 2025 (previously the 2024-25 average price-earnings ratio of 8 times) to maintain the purchase.