24Q2's revenue and net profit to mother were -1% and -53% year-on-year. Domestic business was steady, but poor overseas business performance caused an increase in expense ratios that dragged down profit performance. The company promotes channel operation efficiency and relies on a multi-brand matrix to continuously increase market share. The estimated net profit for 24-26 will be 0.152 billion yuan, 0.181 billion yuan, and 0.213 billion yuan, with year-on-year growth rates of 44%, 19%, and 18%. The current market value corresponds to 24PE15.5X and 25PE13X, maintaining a highly recommended rating.

Strong performance in 24Q2. 1) 24H1: The company achieved operating income of 1.45 billion yuan (YoY +5.5%, same below), net profit attributable to mother 0.059 billion yuan (-46.6%), after deducting non-attributable net profit of 0.056 billion yuan (-46.5%).

2) 24Q2: The company achieved operating income of 0.699 billion yuan (YoY -1.1%, due to overseas business drag down, domestic business +9%), net profit to mother 0.029 billion yuan (-52.9%), net profit not attributable to mother 0.026 billion yuan (-57.4%). Overseas business losses in Q2 increased by more than 30 million over the same period last year, and domestic business profits did not decline in Q2.

Revenue splitting.

1) By brand: 24Q2 ELLASSAY, Laure IRO, China and self-portrait grew 13.3%, 17.6%, 18.7%, and 13% respectively.

2) Channel division: 24Q2 online increased by 33.3% year-on-year, accounting for an increase of 3.7 pct to about 18%. Offline direct stores are growing faster than distribution stores.

3) Number of stores: As of the end of June '24, the number of company stores was 7 to 645, of which ELLASSAY stores were -1, Laurel stores - 3, Ed Hardy stores - 6, IRO Paris - 3, self-portrait stores +5, and other brand stores +1.

The gross margin of 24H1 increased by 1.7 pct to 69.2%, the cost ratio increased by 5.0 pct to 61.6% during the period (mainly the sales expense ratio increased by 4.7 pct), and the net margin decreased by 4.2 pct to 6.0%. 24Q2 gross margin increased by 2.0pct to 71.4%, the cost ratio increased by 7.6pct to 64.9% during the period (mainly due to poor overseas revenue but cost rigidity led to an increase of 7.4 pct in sales expenses), and the net margin decreased by 4.9 pct to 6.0%.

1) By brand: 24H1 ELLASSAY gross margin -1.1 pct year on year, Laurel gross margin -5.2 pct year on year, Ed Hardy and Ed HardyX gross margin +3.3 pct year on year, IRO Paris gross margin +2.3 pct year on year, self-portrait gross margin -0.3 pct year on year.

2) Channel division: 24H1 offline gross margin +0.5pct year on year, online gross margin +3.9pct year on year; direct store gross margin -0.46pct year on year, distribution store gross margin -1.46pct year on year.

24H1 inventory is under pressure. 1) 24H1 net operating cash flow of 0.158 billion yuan (-42%). 2) The number of accounts receivable turnover days as of the end of June '24 was +3 to 42 days year-on-year. 3) The number of inventory turnover days as of the end of June '24 was +80 to 380 days year-on-year.

Profit forecasting and investment suggestions: The company is deeply involved in differentiated high-end multi-brand matrices, collaboratively expanding channel resources, strengthening brand channel operation efficiency, and growing domestic business steadily. Considering that the pressure on overseas business is dragging down profit performance, we lowered our profit forecast. The revenue scale for 2024-2026 is 3.1 billion yuan, 3.36 billion yuan, and 3.64 billion yuan, with year-on-year growth rates of 6%, 8%, and 8%. Net profit to mother was 0.152 billion yuan, 0.181 billion yuan, and 0.213 billion yuan, with year-on-year growth rates of 44%, 19%, and 18%. The current market value corresponds to 24PE15.5X and 25PE13X, maintaining a highly recommended rating.

Risk warning: risk of falling short of expectations in passenger flow and purchasing power, risk of falling short of expectations in expanding new brand stores, risk of inventory impairment.