HLA CORP(600398)：ONLINE DISTRIBUTION CHANNELS GROWING STEADILY;IMPROVING CAPABILITIES IN DIGITAL OPERATIONS

1H22 earnings miss our expectation
HLA Corp announced 1H22 results: Revenue fell 6.1% YoY to Rmb9.52bn and net profit attributable to shareholders declined 22.7% YoY to Rmb1.28bn. Earnings came under short-term pressure due to impacts from COVID-19 resurgence, missing our expectation. In 2Q22, revenue decreased 7.2% YoY to Rmb4.3bn and net profit attributable to shareholders declined 31.6% YoY to Rmb553mn. Thanks to its advantage in business scale and its efforts to build a portfolio of multiple brands, the company showed resilience and strengths in brand management, in our view.
Trends to watch
Gross profit margin roughly flat YoY; selling expense ratio rising. In 1H22, HLA's overall gross profit margin rose 0.31ppt YoY to 43.91%, remaining stable despite headwinds. Expense ratios for selling rose 4.41ppt YoY to 18.67%, G&A fell 0.42ppt YoY to 4.89%, and R&D grew 0.36ppt YoY to 0.86%. In particular, we believe the rapid rise of the selling expense ratio largely reflects increases in employee salaries, rental costs and property management expenses. As a result, the company's net profit margin declined 2.88ppt YoY to 13.41% in 1H22.
Expansion of brick-and-mortar distribution channels continued; revenue and profits of online distribution channels both increased. In 1H22, steady expansion continued for HLA’s distribution channels with directly operated distribution channels growing rapidly but the number of franchise and jointly operated stores falling slightly. The number of directly operated stores for the HLA brand increased by a net 98 stores to 825 stores and that for other brands increased by a net 46 stores to 434 stores, but the number of franchise and jointly operated stores decreased by a net 78 stores YoY to 6,537 stores. Based on distribution channels of similar brands in the market, we think HLA mainly transformed or opened stores at some shopping malls. In 1H22, the company’s revenue from directly operated distribution channels grew 49% YoY to Rmb1.49bn, but revenue from franchise stores and other distribution channels fell 13% YoY to Rmb6.82bn with gross profit margin remaining roughly stable. Revenue from online distribution channels increased by 5.8% YoY to Rmb1.37bn with gross profit margin rising 3.9ppt YoY to 43.40%. At present, the company’s online distribution channels mainly consist of Taobao, Tmall, JD.com and Vipshop, and it is stepping up efforts to expand its presence in livestreaming e-commerce platforms such as Douyin and Kuaishou.
Inventories growing YoY; improving three major digital platforms to support upstream and downstream operations. HLA's inventories increased by 17.93% YoY to Rmb8.5bn in 1H22, mainly because the company replenished inventories considerably amid optimism earlier this year; however, COVID-19 resurgence in some regions weighed on its sales and logistics. Inventory turnover days grew YoY to about 280 days but the efficiency of inventory turnover remained stable. In addition, HLA is gradually improving its three digital platforms for R&D data management, supply chain management, and retail operations and management, and it strives to acquire high-quality suppliers with strong capabilities in product development and quick response to customers’ needs, so as to improve its capabilities in quickly replenishing orders and launching new products.
Financials and valuation
As COVID-19 resurgence’s short-term impacts on HLA's operations and profits were worse than expected in 1H22, we lower our 2022 and 2023 earnings forecasts by 16.1% to Rmb2.23bn and by 3.1% to Rmb2.81bn. The stock is trading at 8.6x 2022e and 6.9x 2023e P/E. We maintain an OUTPERFORM rating. Due to factors such as negative impacts from the COVID-19 pandemic and fluctuations in the sector’s valuations, we lower our target price by 12% to Rmb5.42 (implying 10.5x 2022e and 8.3x 2023e P/E), with 21.5% upside.
Risks
Slow progress of expanding distribution channels; disappointing performance of new stores; unexpected changes in market feedback for brand designs.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。