Introduction to this report:

The 2022 results are mainly affected by the pandemic. Corporate governance has improved dramatically, and profit margins are expected to exceed expectations.

Summary:

Investment advice: Maintain an “increase in holdings” rating. Considering that Xiabu restarts expansion and continues to grow, the strategy to reduce costs and improve efficiency is expected to be gradually revealed in 2023. The 2023-2024 and new 2025 EPS forecast was raised to 0.32 (+73%) /0.59 (+113%) /0.99 yuan. Considering that the company is still in the brand adjustment stage, the 2023 25x valuation (about 0.75 times the industry's valuation discount) corresponds to the target price of 10.0 Hong Kong dollars (+73%).

The performance was in line with expectations: 2022 revenue of 4.72 billion yuan/ -23.1%, net profit of the mother - 350 million yuan, up 20% year-on-year loss, in line with previous performance forecasts. The proposed dividend is 0.028 yuan/share.

Taken up the net opening of 41 stores, the overall net revenue drop was less than that of Xiabu (net -40 stores). The two brands had similar declines in the same store, -22%/-23%, respectively. Looking at the split, the turnover rate was about 1.9/2.0, respectively. Compared with -24%/-13%, the group buying business increased and the customer unit price increased slightly. The plan is to open 100+ restaurants in Xiabu in 2023, work together to continue expanding eastward and southward, try to sink, and expand overseas.

There are still differences over cost reduction and efficiency ceiling. The share of raw material costs remained stable at 38.1% in 2022, employee costs rose to 32.9% /+3.1pct, and property rent costs accounted for 5.3% /+0.5pct. Depreciation and amortization accounted for +3.3pct to 20.4% year-on-year. Other net losses fell to $16.5 million from 200 million in 2021 due to fewer store closures compared to 2021. The company strengthened supply chain and digitalization during the pandemic, strictly controlled the rent-to-sale ratio of new stores, and included operating profit in KPI indicators. Compared to high profit margins, current expectations are still insufficient.

Risk warning: repeated epidemics, store openings falling short of expectations, obvious decline in the same stores, etc.