Action
　　Blue Moon Group Holdings announced its 2021 results: Revenue rose 8.6% YoY to HK$7.597bn and attributable net profit fell 22.5% YoY to HK$1.014bn, slightly better than our expectations. Revenue rose 14.9% YoY in 2H21 after falling 3.3% YoY in 1H21, and the firm recorded a profit of HK$1.058bn in 2H21 after suffering a loss of HK$44mn in 1H21.Fundamentals improved notably in 2H21, mainly thanks to the ramp-up of new products and the strong growth of the offline distributor channel. We believe that the firm will enjoy a sustained improvement in fundamentals following its operating reforms, and we are optimistic about the sustainability of its revenue growth and its profit growth. We upgrade the firm to OUTPERFORM for the following reasons.
　　What’s changed?
　　Operating reforms around channels, products, and management led to a notable improvement in fundamentals in 2H21. The firm’s　revenue and profit in 1H21 both declined due to intensified competition in the industry and adjustment of offline channels. In 2H21, the firm carried out a series of operating reforms around channels, products, and management, which improved its fundamentals and lifted its main operating indicators. Revenue grew 14.9% YoY in 2H21 (vs. -3.3% YoY in 1H21), marking a return to growth. Gross margin rose from 53.5% in 1H21 to 60.7% in 2H21, returning to normal levels. The firm recorded a profit of HK$1.058bn in 2H21, vs. a loss of HK$44mn in 1H21.
　　Sales of new products increased at an accelerated pace; offline distributor channel grew strongly. 1) The optimization and　adjustment of the distributor channel reversed the declining revenue across distributor channel, and we believe the channel will continue to grow in the future. The firm enhanced distributors’ operational capabilities through digital empowerment, penetrating lower-tier markets, and expanding outlet coverage. Revenue from the distributor channel grew 22% YoY in 2021, and the growth was strong at over 50% in 2H21, reversing the downward trend since 2H20. 2) The accelerated launch of new products drove up revenue and unit price. In 2021, the firm launched best-selling products such as laundry detergent for underwear and sterilization and deodorization laundry detergent, which boosted the fabric care business. Revenue　of fabric care business grew rapidly by 15.4% in 2021, demonstrating the firm’s strong brand momentum and market competitiveness.
　　As a leading home care brand, we think that the firm has　significant growth potential. 1) Category expansion: We expect that the firm plans to accelerate its development in the personal hygiene and home care industries, and launch sub-categorized and high-end new products, to optimize the category structure and increase the growth potential of market segments. 2) Channel coordination: The firm has strong online multi-platform operation capabilities. On the basis of consolidating its advantages in traditional e-commerce, it plans to actively develop live streaming e-commerce and fresh food e-commerce platforms. In addition, it plans to increase the depth and breadth of its low-tier market coverage. We believe the firm will be able to coordinate the development of these various channels.
　　How do we differ from the market? We believe the reform of the　distributor channel will drive sustainable business growth, and the strong brand will help new products ramp up quickly. Potential catalysts: Ramp- up of new products; penetration into lower-tier markets; decline in raw material costs.
　　Financials and valuation
　　Considering that operating reforms are paying off and the firm’s fundamentals are likely to continue improving, we raise our 2022 EPS forecast by 6.7% to HK$0.22; we introduce our 2023 EPS forecast of HK$0.25. The stock is trading at 22x 2022e and 19x 2023e P/E. We upgrade the stock to OUTPERFORM and maintain TP of HK$6.80, which implies 31x 2022e and 27x 2023e P/E and offers 40% upside.
　　Risks
　　Intensified industry competition; fluctuations in raw material prices; inadequate promotion of new products; product quality problems.