Youngor is a leading domestic menswear manufacturer with business covering clothing, real estate, and investment. The clothing segment has grown steadily in recent years under the strategy of focusing on the main business. In the meantime, Youngor has made significant improvements in brands and channels. In the short term, Youngor’s growth will be driven by its flagship brand, and in the long run, transformation of all new and old brands will provide sustainable growth momentum. The real estate segment is developing smoothly, with stable cashflow and low risk exposure. The investment arm has transformed from financial investment to industrial investment to better empower the main business. We believe Youngor will step into a bright future as an international fashion group, and initiate coverage with a “BUY” rating.

A diversified enterprise with clothing as its main business.

Youngor started with the clothing business, and now it mainly operates in three segments, including branded clothing, real estate and investment, with profit contributions of Rmb0.88bn/2.29bn/1.84bn in 2021, respectively. The Company is a leading enterprise in the field of menswear in China, with YOUNGOR as its flagship brand. In 2021, the Company achieved revenue of Rmb13.6bn and attributable net profit （ANP） of Rmb5.1bn.

Clothing business: Rising steadily on regained strategic focus.

Clothing has been the main business of the Company in recent years, and the earnings have been growing steadily, posting a revenue/profit CAGR of 5.8%/5.2% from 2015 to 2021. Youngor has made some organizational adjustment in terms of brands and channels. 1） Channels: The Company established Kuafu Technology and increased its capital to Rmb2.6bn in Apr 2021 to expand its online presence. The proportion of online sales in 2021 exceeded 12%, with a 49% CAGR over the past six years. The offline channel mix has also been optimized. The proportion of department stores dropped from 26% in 2019 to 19%, with greater emphasis on opening larger stores.

The average store area in 2021 was 226 sqm, with a 5-year CAGR of 9%.

Store digitalization is in progress, which should help improve the operational efficiency. 2） Brands: The flagship brand has maintained good performance over the years, with a revenue CAGR of 4.2% from 2014 to 2021. Other brands were mostly sold via brand collection stores in the past but have started to operate independently over the past two years. Some of the brands have been repositioned and switched style, which leads to some fluctuation in earnings since 2020. However, we believe that this will lay a good foundation for future development. In 2021, Youngor acquired and started to operate new brands such as Helly Hansen （HH） and Undefeated, covering more product lines like outdoor, street fashion and other boom segments, to further enrich the Company's brand matrix.

Real estate business: Shortening the collection period.

After Youngor proposed the destocking strategy in 2017, the scale of the real estate business has declined, but the profitability and collection of receivables were both improved. As of the end of 2021, the sell-out rate has reached 79% of its properties for sale, and more than half of the new projects were cooperative projects that are running smoothly with minimal risks. In the future, the Company will still focus on accelerating account collection and remain cautious in expansion. In 2022, it plans to start two new projects with a combined gross floor area （GFA） of 294,500 sqm, and complete six projects with a combined GFA of 797,000 sqm. There will be an additional saleable GFA of 321,200 sqm in 2022 due to new project launches or additions.

Investment business: Transformation to industrial investment to facilitate the development of the main business.

The average annual gains from the investment business since 2014 reached Rmb1.9bn, recording a profit contribution of more than 30% （except in 2017） and serving as a major source of profit for the Company. In 2019, Youngor further focused on the main business of clothing, reduced financial investments, and switched to strategic investments. During the past two years, Youngor invested in a makeup company in Shanghai, an outdoor artificial grass giant and a domestic cycling brand. It also acquired a 40% stake in Undefeated, an American trendy brand, and jointly operated the HH brand, enlarging the Company's coverage in the consumer field to better empower its main business.

Potential risks: Covid-19 disruptions hurting offline store sales and impeding real estate sales and construction; brand aging and failure to launch brand upgrades as anticipated; inventory backlog due to lower-than-expected sales in the clothing segment; fluctuations in investment income due to risks from investment projects; policy changes in the real estate industry.

Investment recommendation: Youngor has leveled up its focus on the main business of clothing. The main brand has grown steadily, while the rest of the brands are undergoing a period of adjustment-either brand repositioning or style switch. Also, the Company has acquired and cooperatively operated some brands in niches with higher prosperity, which could offer a potential earnings boost in the future. In the short run, Youngor is driven by its main brand. In the longer run, the Company is moving towards its goal to build into an international fashion group. In addition, the real estate business is likely to advance steadily given smooth project execution and sound cashflow, while the investment business has switched from financial investment to industrial investment to empower the main business. Overall, we believe the transformation is in the middle/late stage, and will show results in the next 2-3 years. We put our 2022E/23E/24E EPS estimates at Rmb1.04/1.16/1.30. Through the sum-of-the-parts （SOTP） valuation methods, we assign a target market cap of Rmb14.8bn/6.8bn/ 17.1bn-26.8bn to the clothing/real estate/investment business, respectively, and apply a 10% conglomerate discount to derive a combined target market cap of Rmb34.8bn-43.4bn in 2023, corresponding to a target price range of Rmb7.50-9.40. We initiate coverage with a "BUY" rating.