Description of the event

The company achieved revenue, net profit attributable to mother, net profit after deducting net profit of 11.37, 1.64, and 1.51 billion yuan in 2024H1, with year-on-year changes of +1.5%, -2.5%, and -9.3%. Among them, single Q2 achieved revenue, net profit attributable to mother, and net profit not attributable to mother of 5.19, 0.75, and 0.63 billion yuan, with year-on-year changes of -5.9%, -14.4%, and -27.5%. In addition, the company plans to pay 1.1 billion in mid-term dividends, accounting for 67.5% of 2024H1's return to mother.

Incident comments

Q2 The main brands bucked the trend and increased their growth rate online, and group purchases were under pressure. Main brand: Q2 revenue was -1% year-on-year, and the decline under pressure on offline consumption increased month-on-month. Among them, franchise channels, mainly street stores, are expected to be under the most pressure. Direct sales are expected to be resilient under the relative resilience of customer flows and store openings, while e-commerce continues to grow at a high rate driven by the omni-channel layout of traditional categories, increased product-specific payments, and new categories. Q2 The gross margin of the main brand is +1pct year-on-year, which is expected to be driven by an increase in the share of direct management, controlled discounts, and profit contributions from new e-commerce categories. In addition, the number of customers in street stores has declined significantly in a weak consumer market. The company's inefficient store optimization has led to a net closure of 46 franchise channels, and direct-run stores, mainly shopping centers, have maintained a net opening. Group buying: Q2 high base combined revenue -27% year-on-year due to increased competition. Under the strategy of increasing price competition in the group buying business, Q2 gross margin was -4 pct to 38.8% year over year, and gross margin fell back to a low point in recent years. Other brands: Q2 revenue was -6% year-on-year. Excluding SPOTS revenue and contributing, the revenue decline is expected to be even greater. It is expected to be dragged down mainly by the impact of the 2023Q3 divestment of boys and girls and the decline in other small brands (OVV & Ince & Select).

Group purchases and non-main businesses dragged down Q2 gross profit margins, and sales expenses increased significantly due to the expansion of direct management and increased publicity. The gross margin of Q2 group purchases and non-main businesses declined a lot, dragging down the company's gross margin of -2.2 pct year on year, and the Q2 sales expense ratio was +2.3 pct to 23.4% year over year, mainly due to increased advertising fees and channel expenses due to the expansion of direct management. The financial expenses ratio of -1.1 pct year-on-year during the same period was mainly due to a decrease in interest expenses for convertible debt-for-equity swaps in the current period. In summary, Q2 Company deducted non-net interest rate -3.6 pct to 12.2% year on year, and net interest rate to mother -1.4 pct year on year was 14.4%. The decline was less than the deducted non-net interest rate, which is expected to increase the income from disposal of non-current assets.

Outlook: The multi-curve layout promotes steady growth in future performance, and is still a high-quality target for dividends. The main brand's weak offline retail drag on Q2 and future performance is gradually digested. Under the orderly layout of multi-curve growth and superimposed incremental business, future performance is expected to grow steadily. In addition, the company has high free cash flow, strong performance stability, high book capital surplus, large undistributed profit multiples, and continuous and excellent dividend capacity. The dividend ratio is expected to maintain around 90% in recent years. The company's net profit for 2024-2026 is estimated to be 2.73/2.87/3.09 billion, -7%/+5%/+8% year-on-year, corresponding PE is 9/9/8X. Assuming a dividend ratio of 90% in 2024, the dividend rate for 2024 is expected to reach 9.8%, maintaining a “buy” rating.

Risk warning

1. Changes in the terminal retail environment;

2. Brand inventory removal falls short of expectations;

3. Macroeconomic changes at home and abroad.