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Leather shoes are not selling well anymore, and the former "shoe king" Aokang is no longer in its glory days.

Just on August 13, OKAN International (603001.SH) disclosed its financial report for the first half of 2024. During the period, the company achieved revenue of 1.375 billion yuan, a year-on-year decrease of 16.40%, and a net profit attributable to the parent of -19.83 million yuan. Compared with the net profit attributable to the parent of the same period last year of nearly 9 million yuan, the company turned from profit to loss.

It should be pointed out that ST Aokang had experienced twists and turns before: after losses of 374 million yuan and 93 million yuan in 2022 and 2023 respectively, the company finally bid farewell to losses in the first quarter of 2024, achieved a net profit attributable to shareholders of 23 million yuan, and other risk warnings were revoked, successfully removing the hat. But now, the company has suffered losses again in the second quarter of 2024. Can the "midfield battle" usher in a turning point?

Image source: IC photo

Loss of nearly 20 million

"The company continued to invest in product research and development, advertising and promotion, but failed to achieve effective output in the short term. The company's cost and expense control in the first half of the year failed to cover the decline in gross profit caused by the decline in revenue, resulting in a negative net profit attributable to the parent company in the current period." In the 2024 semi-annual report performance forecast disclosed in July, OKAN International explained the performance loss in this way.

As the former "No. 1 Chinese men's shoe stock", Aokang International has faced a transformation dilemma in recent years: as sports casual shoes are used in more and more scenarios, they have replaced traditional leather shoes. The company has also tried to transform from traditional leather shoes to business casual and fashion casual shoes, but the transformation results do not seem to be ideal.

In 2018, OKAN International achieved a net profit attributable to shareholders of RMB 137 million and a non-net profit of RMB 90.9 million, which was the peak of the company's profitability. Since then, the company's profitability has weakened significantly, and its non-net profit has been in the red for five consecutive years, especially in 2022, when the net profit was -422 million yuan, and in 2023, when the net profit was -158 million yuan.

OKAN International promotes a multi-brand operation model. It not only has its own brands "OKAN" and "KAN LONG", but also acts as an agent for the leisure brand "Skechers" and the sports brand "Puma".

In terms of brands, the main brand Aokang has always been the bulk of revenue, with revenue of 892 million yuan in the first half of 2024, a year-on-year decrease of 17.45%; the Kanglong brand had revenue of 126 million yuan, a year-on-year decrease of 27.6%; Skechers had revenue of 150 million yuan, a year-on-year decrease of 14.80%; other brands had revenue of 78 million yuan, a year-on-year increase of 1.71%.

In addition, the gross profit margins of brands such as Aokang, Kanglong, and Skechers have all declined to varying degrees compared with the same period last year.

Despite holding the agency of "Skechers" and "Puma", the company's agency brand revenue contribution seems to be lower than expected. From 2021 to 2023, the Skechers brand achieved revenue of 368 million yuan, 264 million yuan, and 311 million yuan respectively, contributing only about 10% to the company's overall revenue.

During the same period, Puma's revenue contribution was even lower and was included in the "other brands" category.

From 2021 to 2023, the "other brands" including Puma achieved revenue of 127 million yuan, 145 million yuan and 171 million yuan respectively.

From the perspective of terminal channels, OKAN International's offline stores have a trend of shrinking. As of the end of the first half of 2024, the company has 2,346 physical stores in China, a decrease of 100 from 2,446 at the end of 2023.

In addition, the company has 20 dealerships in Vietnam and 1 dealership in Laos.

Online, OKAN International is actively expanding new channels and has reached in-depth strategic cooperation with JD.com Express, providing "online ordering, shipment from nearby stores, and instant delivery" services. As of the reporting period, more than 400 OKAN stores in Beijing, Shanghai, Guangzhou, Chengdu and other cities have launched JD.com Express.

Sales expenses are high, and R&D accounts for less than 2%

Although it has seen the limitations of the traditional leather shoes market and has transformed to explore the field of sports leather shoes in recent years, the results of OKAN International's transformation have been relatively limited.

During this process, OKAN International re-emphasized the men's leather shoes market, focused on the main category of men's shoes, strengthened the positioning of "more comfortable men's leather shoes", and launched a series of marketing activities.

For example, in December 2022, the company officially announced William Chan as the image spokesperson for the OKAN brand, and pioneered the launch of OKAN sports leather shoes, launching three major series: "Breathable", "Wanbu" and "Cloud".

In May 2023, the company held a strategic new product launch conference, and together with brand spokesperson William Chan and brand ambassador Zhang Ruonan, jointly unveiled the first sports leather shoe show of Aokang. In September of that year, the company's main brand Aokang made its debut at the Milan Fashion Week in Italy. Aokang brand and calligraphy artist Zhu Jingyi launched the "Awakening" series of sports leather shoes...

During this process, it can be seen that OKAN International's sales expenses are relatively high.

From 2021 to 2023, the company's sales expenses were RMB 864 million, RMB 1.12 billion and RMB 1.149 billion, respectively, accounting for approximately 29%, 41% and 37% of the total revenue, respectively.

In the first half of 2024, although the company's sales expenses decreased by 13.85% year-on-year to 504 million yuan, its proportion in total revenue was still high, reaching about 37%.

Compared with the high sales expenses, the company's R&D investment is slightly insufficient.

From 2021 to 2023, the company's R&D investment was RMB 44 million, RMB 47 million and RMB 51 million respectively, accounting for only 1.48%, 1.72% and 1.64% of total revenue, all less than 2%.

According to rough estimates based on the data, OKAN International's net profit margin in recent years has been as low as about 1%. For example, in 2019, its revenue was 2.726 billion yuan, and its net profit attributable to the parent was 22.5 million yuan; in 2020, its revenue was 2.738 billion yuan, and its net profit attributable to the parent was 27.94 million yuan; in 2021, its revenue was 2.959 billion yuan, and its net profit attributable to the parent was 34.05 million yuan.

It should be pointed out that OKAN International’s previous internal control turmoil has also become one of the factors that have hindered the company’s development.

On May 16 this year, the Zhejiang Securities Regulatory Bureau issued an "Administrative Penalty Decision" stating that from 2021 to April 2023, Wang Zhentao, the actual controller of Aokang International, illegally occupied nearly 1 billion yuan of the listed company's payment through the Wenzhou Ouhai Nanbaixiang Rufei Shoes and Clothing Store and Yongjia County Aoguang Shoes Store, and the company also failed to disclose the relevant situation truthfully, accurately and completely in the financial report from 2021 to the first half of 2023. In response, the listed company and its actual controller Wang Zhentao received a fine of 3 million yuan each.

At the end of June, as the company's internal control deficiency rectification in 2023 had been completed, the accounting firm issued a standard unqualified opinion for the company's internal control in 2023, and the company's stock withdrew other risk warnings, thus removing the hat.

Regarding the rectification of the above matters, the company also mentioned in the 2024 semi-annual report that "non-operating capital occupation has been repaid", and the bank accounts related to the above-mentioned related transactions of the actual controller were cancelled. "The account of Wenzhou Ouhai Nanbaixiang Rufei Shoes and Clothing Store was cancelled on July 8, 2022, and Yongjia County Aoguang Shoe Store was cancelled on October 19, 2023."

Although the company's internal control turmoil has gradually subsided, the capital market has chosen to vote with its feet.

As of the time of publication on August 14, the total market value of OKAN International was less than 2 billion yuan, a 90% decrease from its peak of 22 billion yuan.