CMB International: Maintains "Buy" rating on JNBY (03306) with target price raised to HKD 23.30

Zhaojin International released a research report stating that it maintains a "buy" rating on JNBY (03306) and raises the target price to 23.30 Hong Kong dollars, based on a forecasted price-earnings ratio of 12 times for the 2026 fiscal year (previously 10 times for the 2025 fiscal year). The bank slightly lowered the net profit forecast for the 2026/2027 fiscal year by 7%/8% to reflect: 1) a faster sales growth rate (mainly from new brand contributions), 2) gross margin lower than expected, and 3) operating leverage below expectations. Overall, the company's sales and net profit resilience remains strong and continues to lead the industry, but the net profit growth for the 2026 fiscal year may be relatively moderate. The forecasted dividend yield for the 2026/2027 fiscal year is approximately 7.5%/8.1%. The current valuation corresponds to approximately 10 times the forecasted price-earnings ratio for the 2026 fiscal year, slightly higher than the 8-year average of around 9 times. Zhaojin International's main points are as follows: Encouraging retail trend in July-August 2025 Management indicated that retail growth has improved from low single-digit growth in the first quarter of the 2025 fiscal year to high single-digit growth in the second quarter, and then accelerated to double-digit growth in July-August. Same-store sales growth is also expected to improve simultaneously. Reasons include: 1) low base, 2) steady performance in outlet channels, 3) upgrades in member management and customer service (increased high-level member/VIP activities and services, enhanced brand awareness), and 4) new product launches in the autumn. Management provided guidance for the 2026 fiscal year of "ambitious sales growth, but conservative profit margin," which the bank believes is not difficult to achieve. The company reaffirmed its medium- to long-term sales targets (retail sales of 10 billion RMB, listed company sales of 6 billion RMB), so achieving high single-digit sales growth in the 2026 fiscal year is necessary. It also confirmed its long-term profit margin target (gross margin of over 65% and net margin of over 15%), making it reasonable to achieve low- to mid-single-digit net profit growth in the 2026 fiscal year. Regarding sales growth in the 2026 fiscal year, multiple driving factors include: 1) a low base due to a warm winter last year, 2) more member services and equity upgrades, with the good performance in July-August validating its effectiveness, expecting to continue increasing the sales share of VIPs, 3) new brands onmygame and B1OCK are expected to continue rapid growth in the 2026 fiscal year (both had growth of about 70% in the 2025 fiscal year), and 4) at a net profit margin higher than the long-term target, the company has the flexibility to slightly increase retail discounts to boost sales and accelerate destocking. As for net profit in the 2026 fiscal year, if same-store sales accelerate and operating leverage is released, there is a possibility of faster growth than in the 2025 fiscal year. However, considering the macroeconomic weakness in China from June to December, the management's outlook remains cautious, and the company's intentions for brand building (advertising and marketing expenses have grown faster than sales in recent years), the bank's view is still conservative. The performance for the 2025 fiscal year roughly met expectations. Revenue increased by 5% year-on-year to 5.55 billion RMB, net profit increased by 6% year-on-year to 898 million RMB, which is basically in line with institutional and Zhaojin International expectations. The gross margin decreased by 0.3 percentage points year-on-year to 65.6% (slightly lower than Zhaojin International's expectation of 66.3%), but the effective tax rate was better than expected (26.3%, better than Zhaojin International's expected 29%) to offset the impact. E-commerce sales grew strongly (18% increase, compared to 19% in the 2024 fiscal year), partially benefiting from the acquisition of onmygame, a children's clothing brand that focuses on online channels. Self-operated store sales decreased by 6% year-on-year (compared to 20% in the 2024 fiscal year), partially due to the impact of the transition of self-operated stores to a distribution system, while distributor store sales increased by 10% year-on-year (compared to 18% in the 2024 fiscal year). On the one hand, the fundamentals of individual stores remain sound (same-store sales decreased by 0.1%, but considering the macroeconomic weakness, the first half of the 2025 fiscal year had a high base, it was not bad). On the other hand, it is also worth noting the overall growth sources. New brands have become the main growth engine (year-on-year sales growth of over 100%), while the core brand JNBY only grew by 2%, and the 24% increase in inventory size year-on-year also needs attention. The company maintained a dividend payout ratio of around 75% for the 2025 fiscal year, resulting in a current dividend yield of around 7%.