ESOP targets stabilize earnings expectation but sentiment overhang remains

　　贝泰妮(300957)

　　2023 outlook. Despite a miss in 4Q, we think Botanee is set to recover alongwith China’s reopening, thanks to its OMO distribution network and anunchallenged R&D franchise that differentiates from peers. Our channel checksuggested Winona 2M23 sales grew 20%+ on Tmall/ Taobao and 300%+ onTiktok. For its offline business, we still see huge potential to expand fromcurrently 19% to 26% of total revenue by 2024E, when Botanee onlypenetrates less than 5% of the national drug stores at present. We believe thetrend matches well with Botanee’s premium branding, as shopping experienceand direct customer care is prioritized at physical stores. Separately, weexpect a relatively stable GPM for 2023E, despite a potentially widening onlinepromotion incentive, thanks to a rising contribution from high-end/ new brandssuch as AOXMED/ Winona Baby etc. Promotional and R&D expense, in ourview, will grow in line with peers in the post COVID era and, hopefully, theinflation would be partially offset by a lower administration expense.

　　Positive takeaway from the restrictive shares incentive plan. Along withthe results announcement, Botanee also reported its ESOP plan for its staff.The plan will grant 1.5% of Botanee’s shares to 298 employees (coveringboard members and key operation managers) if the stacked revenue and netprofits growth is not lower than 28%/ 61.3%/ 100%, respectively, for the year2023/24/25E. We view this positively as the target likely exceeds marketexpectation and provides a clear financial guidance to the market.

　　Sentiment overhang remains. Subsequent to the product scandal over theDouble 11 campaign last year, the departure of co-founder and the sell-offfrom a pre-IPO investor continues to weigh on share price. While areplacement for the founder was appointed internally, Botanee will have toreestablish its track record to the market, particularly when the low hangingfruit of livestreaming distribution is gone.

　　Earnings change. To reflect the 4Q results and the ESOP target, we cut our2023/24E revenue by 9% each and this leads to an average 9% cut in netprofits for the periods.

　　Valuation. Our new TP is based on 48.5x end-23E P/E (from 2.0x PEG) thatrepresents -1sd below its average since IPO. We switch our methodology fromPEG to P/E as we now have a longer listing history to reasonably trackBotanee’s historical valuation. We benchmark our target multiple to -1sdbelow average to reflect the sentiment overhang mentioned above.