The 2H23 result was surprisingly impressive, as the recent macro environment was tough. And given such a resilient sales trend, decent margin improvement and attractive valuation (5x FY24E P/E and 14% yield), we think JNBY is a strong BUY now.
FY23 result was a strong beat. In FY23 (ending Jun 2023), JNBY’s sales and net profit increased by 9% and 11% YoY to RMB 4.5bn and RMB 621mn, beating BBG/ CMBI est. by 5%/ 6% and 21%/ 26% respectively, and that was also far better than the previous guidance of LSD sales growth and low-teens net profit decline. Such result was, in fact, implying an extremely strong rebound in 2H23 (Jan-Jun 2023), following a rather suppressed business environment in 1H23. For 2H23, sales and net profit surged by 31% and 116%, better than BBG/ CMBI est. by 10%/ 13% and 80%/ 103%.
We believe the beat in sales was driven by: 1) robust 9% SSSG, 2) resilient 25% e-commerce sales growth (+ve growth in traditional platforms plus rapid penetration in new social media platforms like Tik Tok and XiaohongShu) and 3) meaningful breakthrough in active members to 510K (from 420K) through upgrades in store image and customer experience. The beat in net profit was due to: 1) significant GP margin expansion (66% in 2H23, already exceeded the 65%+ FY26E target) through ASP hike, better retail discounts and channel mix, 2) meaningful operating leverage and 3) closure of some non-preforming stores. Inventory days was at 191 days in FY23 (quite stable vs 190 days in FY22).
FY24E guidance is more optimistic but still highly achievable. The management is now aiming for 10%+ growth for both sales and net profit in FY24E. We think that is highly achievable, because: 1) retail sales growth remained robust in Jul 2023 (unlike China total retail sales growth), 2) the base would trend lower since Sep 2023, 3) loads of improvements and upgrades in terms of member management and customer services (on both online and offline) had just started to ramp up after China’s re-opening and 4) growth momentum is still strong for those new social media platforms.
Margin-wise, as we expect retail discounts and channel mix to at least stay at a healthy level, GP margin should be at 65% or above. Also, while we expect JNBY to invest heavily on brand building by acquiring more talents and spending more in A&P, there could still be some leverage from the continual increase in per store productivity.
Maintain BUY and raise TP to HK$ 14.26. We revise up FY24E/ 25E/ 26E net profit forecasts by 21%/ 15%/ 24%, to factor in: 1) the rapid same store and e-commerce sales growth, 2) substantial increase in GP margin and 3) stronger-than-expected operating leverage. We remain BUY and believe the risk and reward are very decent, supported by a solid turnaround and attractive valuation of 5x FY24E P/E and 14% yield. Our new TP is based on 9x FY24E P/E, (same as 8 years average and rolled over from 10x FY23E P/E).