Guosen: Maintains POU SHENG INT'L (03813) "outperform" rating, target price lowered to HK$0.59-0.69.

Guosen released a research report stating that it maintains a "outperform" rating on POU SHENG INT'L (03813), based on the continued pressure in the short-term retail environment. It slightly lowered profit forecasts, expecting a net profit of 4.9/6.2/7.6 billion yuan for 2024-2026, with year-on-year changes of -1%/+27%/+23%. It lowered the target price to 0.59-0.69 Hong Kong dollars. It is optimistic about the short-term improvement in profits and the sustainability of medium to long-term growth momentum. Looking ahead, even though revenue growth may be under pressure in the short term due to weak consumer spending, with healthy inventory levels and stable discounts, profitability is expected to continue to improve. The main points of the Guosen report are as follows: - Revenue declined by 11% in the third quarter, with gross profit margin improvement achieved through strict discount control. - Due to the weak domestic retail environment, revenue in the third quarter decreased by 10.8% year-on-year to 4 billion yuan; net profit attributable to shareholders increased by 40.0% year-on-year to 0.1 billion yuan. The discount rate in the third quarter remained stable year-on-year, with gross profit margin increasing by 1.5 percentage points to 33.5% year-on-year. In terms of expenses, the company actively sought to reduce rental deductions, close inefficient stores, and improve efficiency. Sales and management expenses in the third quarter decreased by 7.8% year-on-year to 1.37 billion yuan, but due to the decrease in revenue leading to an increase in fixed expenses proportionately, sales/management expense ratios increased slightly by 0.5/0.6 percentage points to 29.9%/4.3% respectively. Mainly benefiting from the improvement in gross profit margin, net profit margin attributable to shareholders increased by 0.1 percentage points to 0.2% year-on-year. As the promotion activities for Double Eleven were earlier this year compared to previous years in the third quarter, in preparation for the gold sales season, inventory in the third quarter increased by 12% year-on-year to 5.5 billion yuan, and inventory turnover days increased by 7 days to 152 days year-on-year, with the ratio of old inventory controlled at a healthy level of 8%. - The performance of the omni-channel continues to be stable, with declining foot traffic putting pressure on physical stores. 1) Online omni-channel revenue increased by 13%, with outstanding performance on the Douyin platform. In the first three quarters, online omni-channel revenue increased by 13% year-on-year, accounting for 27% of total revenue. By empowering online channels to connect private and public domains, as well as physical networks, revenue from B2C public channels (Taobao, JD, Vipshop, and other platforms) and private channels (Fan Weidian) increased by 24% and 2% respectively year-on-year. The Douyin platform actively optimized its live streaming operation structure, integrated district-level and store-level Douyin accounts for local operations, and achieved a doubling of revenue growth, up 100% year-on-year. 2) Same-store sales of physical stores were under pressure due to declining foot traffic, and the company strategically streamlined and upgraded physical stores. In the first three quarters, revenue from physical stores decreased by 14% year-on-year, with same-store sales declining by 17%, and average monthly sales per square meter decreasing significantly year-on-year. The company strategically closed inefficient stores and upgraded some physical stores, reducing the number of net store closures by 64 to 3,459 directly operated stores compared to the beginning of the year, down 2.7% year-on-year as of September 2023, with the average store area increasing slightly year-on-year, and the total sales area decreasing slightly year-on-year. - Sales growth in October turned positive year-on-year, with expectations for improvement in the fourth quarter trend. The company's net operating income in October increased by 4.7% year-on-year to 1.72 billion yuan, mainly driven by online channel growth and expected to be related to the early Double Eleven promotion activity. Overall consumer demand was weak in the third quarter, but there has been some improvement in consumer trends since the fourth quarter began, and we expect the company's sales in the fourth quarter to also improve. Risks: Consumer recovery falls below expectations; supply chain logistics disruptions; channel optimization reforms fall short of expectations.