1H24 performance exceeded our expectations

The company announced 1H24 results: 1H24 revenue also increased 14% to 3.4 billion yuan, and net profit to mother increased 10% to 0.23 billion yuan. Among them, 2Q24 revenue also increased 10% to 1.6 billion yuan, and net profit to mother also increased 17% to 0.1 billion yuan. The performance was higher than our expectations, mainly due to good revenue growth and cost savings.

The company plans to pay a cash deposit of 1 yuan (tax included) for every 10 shares, corresponding to a dividend rate of 39%.

The traditional gold jewelry business is growing well, and joining stores is faster than management's expectations. The company's 1H24 revenue also increased 14% to 3.4 billion yuan, of which 2Q24 revenue also increased 10% to 1.6 billion yuan. By business:

1) Revenue from the 1H24 jewelry business also increased 17% to 3.3 billion yuan. Among them, revenue from the fashion jewelry business and traditional gold jewelry increased by 6%/31% year on year, respectively, accounting for 48%/43% of the company's total revenue. During the period, 17 self-operated stores closed to 257, and the net number of franchise agents opened 69 to 1,194. The pace of franchise store expansion was faster than management's expectations; the online revenue of the 1H24 jewelry business was 0.54 billion yuan, down 4% from the previous year. 2) 1H24 Finney's revenue also fell 27% to 0.15 billion yuan, accounting for 4% of total revenue.

Product and channel structures influence gross profit margins. The gross margin of 1H24 also decreased by 2.5ppt to 22.8%, of which 2Q24 also fell by 2.2ppt to 22.1%, mainly due to the increase in the share of revenue from gold products and franchise channels with relatively low gross margins. Channel optimization drove 1H24's sales expenses rate to decrease by 2.7 ppt to 11.4%, and the increase in depreciation and amortization expenses in the company headquarters building caused the management expense ratio to increase by 0.3 ppt to 1.9%, asset and credit impairment losses of 0.003 billion yuan (vs. 1H23 recouped 0.004 billion yuan), other income and net investment income of 0.002 billion yuan (vs. 1H23 0.006 billion yuan), and 1H24 net profit also increased by 10% to 0.23 billion yuan.

Product strength continues to improve, and one-price products are selling well. Chao Hongji launched a new eight series of rich product matrices around “Stylish Oriental, Exquisite and Versatile”, increased cooperation with well-known designers at home and abroad, empowered products with traditional Chinese elements, continued to increase research and development of advantageous gold product lines, optimized the IP series product layout, and continued to improve product competitiveness. Sales growth in the one-price gold category in the first half of the year was good, and the enthusiasm of franchisees to pick up goods increased.

Development trends

In July-August, the company's terminal sales continued to grow positively in an unfavorable environment, and management maintained the plan to increase the total number of stores to 2,000 by 2025.

Profit forecasting and valuation

The 2024 EPS forecast was basically maintained at 0.42 yuan. Since the terminal retail environment is still quite volatile, the 2025 EPS forecast was lowered by 4% to 0.49 yuan. The current stock price corresponds to 11/9 times the 2024/25 price-earnings ratio, maintaining a neutral rating. Considering the decline in the valuation center of the industry, the target price was lowered by 24% to 5.06 yuan, corresponding to 12/10 times the 2024/25 price-earnings ratio. There is 13% room for growth compared to the current stock price.

risks

Gold prices fluctuated greatly, store expansion fell short of expectations, and market competition was fierce.