20230817-招银国际-中国利郎-01234.HK-1H23_inline_and_FY23E_guidance_maintained_10页_1mb

Company: China Lilang (Hong Kong Stock Code: 1234)
Key Analysis and Summary:

The report covers China Lilang's 1H23 financial performance and fiscal year 2023E (FY23E) guidance. 1H23 results were roughly inline, with revenue of RMB 1.5 billion (7% growth YoY), slightly below CMB International Global Markets' (CMBIGM) estimate of 11% for FY23E. Net profit increased by 5% in 1H23, also slightly below CMBIGM's forecast, resulting from higher gross profit margins (due to smart casual growth and price hikes) but elevated operating expenses, particularly advertising and renovation costs, which surged by 76%.

Despite macroeconomic weakness since May 2023, analysts remain confident about achieving targets with back-loaded growth in 2H23E due to a low base. The turnaround story supports a BUY rating, supported by a 9% dividend yield and attractive valuation. CMBIGM maintained the BUY recommendation but fine-tuned the target price to HK$4.73 (down 17% from previous), reflecting conservative assumptions on higher-than-expected costs.

Inventory levels are healthy at 211 days in 1H23, better managed through direct retail, e-commerce, and consignment channels. Retail sales growth slowed to a low single digit in 2Q23, but the 10% FY23E target was upheld due to strong smart casual performance (driven by consumption trade down) and robust online sales growth via live-streaming.

Financial outlook: CMBIGM cut FY23E net profit forecasts by 2% primarily due to higher operating costs, with projected OP margin of 17.4% and NP margin of 14.7%. Target price downgrade includes risks from potential delays in wholesale sales normalization. Valuation shows a 9x FY23E P/E and a 9% yield, compared to peer averages.

Overall, the company demonstrates resilience with selective growth drivers, but cost management uncertainty may impact margins. Analysts advise caution amid external factors but highlight the stock as undervalued with a turnaround narrative intact.