We are impressed by the results beat and special dividend in 1H24, and the re-rating finally happens in line with what we had predicted half a year ago. Going forward, we believe a slowdown in 2H24E is likely, but HSD sales and net profit growth is still both reasonable and achievable, esp. when the Company’s fan-based growth strategy is still working successfully. Current valuation of 9x P/E and 11% yield is still attractive.
　　A strong set of results in 1H24. Sales increased by 26% YoY to RMB 2.9bn, beating CMBI est. by 12%, thanks to: 1) continual upgrades in products and branding, 2) robust SSSG, supported by improved customer experience (number of active members/ VIPs jumped by 31%/ 36%), store revamps and offline foot traffic resumption and 3) resilient e-commerce sales growth of 24%. Net profit rocketed by 54% YoY to RMB 574mn, better than CMBI est. by 31%, due to: 1) GP margin improvement (through ASP hikes, narrowed retail discounts and better channel mix) and 2) significant operating leverage (as a result of exceptional SSSG). In fact, their sales growth of 26% led the market, much faster than Helian Home’s 15% and LVMH APAC’s 13%. Also, aided by the adoption of more re-orders, the inventory days had been shortened to 137 days in 1H24 (from 191 days in 1H23). Most importantly, an interim DPS of HK$ 0.46 and a special DPS of HK$ 0.39 were proposed, totalling HK$ 441mn, about 5.5% of current market cap (we estimated FY6/24E dividend yield to be at 10.6%).
　　FY24E guidance raised (but slowdown in 2H24E is not surprising). Due
　　to stellar 1H24 results, management raised their FY24E guidance to 15%+/ 30%+ sales/ net profit growth (from 10%+/ 10%+ previously). On one hand, we are not surprised to see a slowdown in growth in 2H24E (due to high base and macro headwinds). On the other hand, we are still slightly more optimistic than the management (as the FY24E guidance is implying 3% sales growth and 6% net profit decline in 2H24E). We are projecting 8% sales growth and 9% net profit growth in 2H24E, consist of: 1) moderate retail sales growth of SD during 2024 CNY, 2) further upgrades in the member’s management and customer services (more membership data sharing with the shopping mall is likely), 3) positives yielded from store revamps (about 30% remained stores to be done in 2H24E), 4) potential restocking from the franchisees (their financial should have improved with lower inventories and better retail discounts). Margin-wise, we only expect a flattish NP margin YoY, due to limited operating leverage (4% SSSG in 2H24) and fall in other income & gains.
　　Maintain BUY and raise TP to HK$ 19.77. We revise up FY24E/ 25E/ 26E
　　net profit forecasts by 19%/ 19%/ 20% to factor in: 1) exceptional SSSG and e-commerce sales growth, 2) GP margin expansion and 3) significant operating leverage. On one hand, we are pleased that the re-rating occurs as we had predicted half a year ago. But on the other hand, we believe the growth rate could still be industry-leading, even though a slowdown is very likely. As the current valuation is not demanding (8.5x FY24E P/E and 10.6% FY24E yield), there is still room for more re-rating. Our TP is based on 11x (from 9x), slightly higher vs 8-year average of 9x.