CHINA LILANG (01234.HK) released its 2026 interim results on August 17, revealing a 19.5% jump in revenue to 2.0647 billion yuan, but profit attributable to equity shareholders fell 11.2% to 215.4 million yuan. The contrast between strong revenue growth and a declining bottom line is the most striking aspect of the financial report.

Pressure on profits stemmed first from gross margin. Gross profit for the period rose 16.3% to 1.0095 billion yuan, lagging behind revenue growth, while the gross margin slipped 1.3 percentage points to 48.9%. The company attributed this to a higher mix of cost-effective products and year-end promotional sales, which lowered the average selling price.

Channel restructuring also pushed up expenses. Selling and distribution costs surged by 140.9 million yuan to 687.2 million yuan, increasing their share of revenue from 31.7% to 33.3%. Within this, direct-store and e-commerce costs rose by 67.3 million yuan to 300.5 million yuan. Consequently, operating profit dropped 10.5% to 232.8 million yuan, with the operating margin falling from 15.1% to 11.3%.

Looking at the business structure, growth was driven more by the light business and online channels. Main series revenue reached 1.3418 billion yuan, up 12.7% year-on-year, but its share of total revenue decreased from 68.9% to 65%. Light business and other series revenue hit 722.9 million yuan, a 34.7% increase, lifting their share to 35%. It is worth noting that the company reported combined data for "light business and other series," so the entire increase cannot be attributed solely to the light business brand.

The company attributed the main series growth to improved operations under the direct-to-consumer (DTC) model, a later Chinese New Year that extended the sales season, and an increased supply of new retail and cost-effective products. New retail revenue grew 39% year-on-year, significantly outpacing overall revenue growth.

Store expansion was not the primary driver of revenue growth. As of the end of June, CHINA LILANG operated 2,820 stores, a net increase of just three from the end of last year. This included 2,465 main series stores (up 19 net) and 355 light business and other series stores (down 16 net). The number of stores operating under the DTC model for the main series increased from 284 to 367, with Hubei province being incorporated into the DTC system during the first half. Reducing distribution layers brings the company closer to end customers, but also means more costs and inventory are borne by the brand itself.

Ending inventory stood at 1.4389 billion yuan, a decrease of 13.3 million yuan from the end of last year, remaining roughly flat. However, the average inventory turnover days increased to 250 days from 231 days in the same period last year. The company said this is related to the higher proportion of sales through consignment and direct channels. In contrast, accounts receivable turnover days fell from 37 to 31 days, reflecting the other side of a decreasing share of distribution sales.

Multi-brand expansion and overseas operations remain in the early stages. The golf brand, Wanxingwei, opened three new stores in the first half. While the company now has five stores in Malaysia, overseas revenue was only 5.9 million yuan, accounting for 0.3% of total revenue, not yet altering the overall revenue structure.

CHINA LILANG has set a target for new retail revenue growth of 20% or more in 2026, with an overall retail sales growth target of no less than 10%. However, as the DTC model and e-commerce scale expand, whether sales growth can translate into profit improvement and whether inventory turnover can be enhanced remain the key indicators to watch in the second half of the year.