The company reported 2Q24 results below market expectations, with net sales down 1.7% YoY (+1.6% in constant currency) given softened consumer demand in China and North America, and increased competition in India. The GPM remained high at 60.0%, supported by channel and product mix optimization, Adjusted net profit declined by 3.4% YoY. The company has lowered its 2024E revenue guidance while maintaining its margin expectation. We lower our earnings forecast to reflect a more conservative view on 2H24 consumer demand. We are transferring coverage with a BUY rating. Our new TP is at HK$28.0, derived from the DCF model (WACC: 8.828%, terminal growth: 2.0%), representing 16x 2024E P/E.
　　2Q24 sales dragged by Asia and North America. The company reported 2.8% YoY constant currency net sales growth for 1H24, with 1Q24 and 2Q24 up 4.1% and 1.5% YoY, respectively, below market expectations. Sluggish 2Q24 results were chiefly due to 1) declines in North America (- 1.2% YoY) given a retail slowdown and a high base effect from robust wholesale and TUMI sales last year and 2) lacklustre results in Asia (-3.0% YoY) given consumer demand largely softened in China and competition intensified in India.
　　Expect margin improvement to continue. The company achieved a record-high half-year GPM of 60.2% (vs. 58.8%/59.8% in 1H23/2H23), mainly driven by channel and product mix optimization. 1) The Direct-to- Consumer (DTC) channel's contribution to net sales rose to 38.1% in 1H24 (from 37.7% in 1H23), buoyed by growth in e-commerce channel (10% of net revenue) and the opening of 82 new stores. 2) Non-travel products (with higher margin) contributed more to net sales (34.4% in 1H24 versus 33.9% in 1H23). The firm reported EBITDA margin of 18.9% and a net margin of 9.8%, up 10 and 20 bps, respectively, owing to significant GPM enhancement and disciplined SG&A expense management. We anticipate these trends to persist in 2H24, supporting further GPM improvement.
　　Guidance adjusted down. The company has revised 2024E net sales growth guidance to low single-digits from high single-digits to reflect uncertainty in consumer demand. Accordingly, we have reduced our 2024E revenue estimate by 10% to US$3,683mn (flat YoY), to reflect a more pessimistic outlook on 2H24 demand recovery, particularly in the Asian market.
　　Valuation. Our TP is at HK$28.0, derived from the DCF model, implying a 2024E P/E of 16x. Catalyst includes the share buyback and the dual listing progress in the US. Risks: weaker-than-expected consumer sentiment and travel demand.