Incidents:
On March 21, the company released its annual results for 22 years. Revenue was in line with expectations, and profits were higher than expected: annual revenue of 4.01 billion yuan (YoY -4.17%), in line with expectations; Guimu's net profit was 49.28 million yuan (YoY -85.5%), which was 4.85% higher than the performance forecast of 47 million.
The number of H2 stores increased due to the pandemic, but the revenue scale declined year-on-year due to the decline in revenue quality. Looking at the revenue side, the company's 22H2 revenue was 2.11 billion yuan (YoY -2.41%, HoH +11.0%), which is in line with the previous performance forecast. The company continued to expand its network of brands in 22H2, but the quality of earnings declined, leading to a decline in revenue scale. Specifically, in '22, H2 added 66 new Taiji stores and 16 new hotpot restaurants, but the revenue quality index declined compared to 22H1. According to the company's announcement, the daily turnover rates of Jiumaojiu, Taiji, and Hot Pot in '22 were 1.6, 2.6, and 2.5 respectively, compared to 22H1 -0.2, -0.3, and +0.1 respectively. Since the number of Aung Hot Pot stores is currently small, the decline in revenue quality of Jiumaojiu and Taiji played a decisive factor in the overall revenue change.
We think the decline in 22H2 revenue quality is still due to the pandemic, so there's no need to worry too much that this situation will continue in '23. According to the company's estimates, revenue losses due to the pandemic for the full year of '22 were about 1.37 billion yuan. The company expressed optimism about its revenue outlook for '23, mainly based on the fact that the pandemic is over. We also observed from high-frequency data that after the Spring Festival in '23, according to the company's mini-program, the number of people queuing for Taieru on Saturday exceeded 2,500/1,800/1200 tables respectively, far higher than the peak level during the pandemic (about 1600/800/800 tables).
All costs have risen, but they will all improve after the pandemic is over
On the cost side, the company's gross margin declined due to rising food prices; the proportion of costs related to business places, such as employee costs, also declined year-on-year when some stores were suspended due to the pandemic, and overall control on the cost side was proper.
1) Specifically, looking at gross margin, the company's 22H2 material cost was 783 million yuan (YoY -0.38%, HoH +17.9%), and the company's gross margin was damaged due to high material costs. 22H2 was 62.8% (YoY -0.76pct, HoH -2.20pct). This is mainly due to the epidemic, where food production and logistics have all been blocked. According to data from the National Bureau of Statistics, during the period when the impact of the epidemic was severe in December '22, the national CPI rose 1.8% year on year. The main contribution was the food category, which increased 4.8% year on year. Among them: pork prices increased 22.2% year on year, and egg, cooking oil and food prices increased 10.0%, 7.2% and 2.6% year on year, respectively. We believe that gross margin levels are expected to rise in '23, based on the judgment that the blockage in food production and logistics will soon come to an end after the pandemic ended. We don't rule out that an active monetary policy may lead to an increase in CPI in '23, but the company's pricing strategy is also expected to increase at that time (price increases were difficult to achieve during the pandemic), so we are optimistic about the company's future gross profit level.
2) Judging from other costs, the company's biggest expenses are rent, labor, and utility costs associated with the place of business.
According to the company announcement, 22H2's employee remuneration, depreciation of right-of-use assets (long-term rent) and utility expenses increased by 7.08%, 15.9%, and 22.4%, respectively. The increase was significant, mainly due to the continued expansion of Taier and Hot Pot. Judging from the revenue share, the overall increase was also significant, reaching 2.48pct, 1.58pct, and 0.79pct respectively. In terms of employee remuneration, the reason for this large increase in revenue was due to a decrease in overall revenue, but employee positions remained during the pandemic closure period; in terms of rent, the increase in revenue share was also mainly due to a decline in the scale of revenue. Moreover, this part of the rent was fixed. The floating rent involved in revenue sharing was not in this category, which further contributed to an increase in revenue share; in terms of utility costs, the share of revenue did not change much, increasing and decreasing as stores switched on and off.
Overall, the absolute quantity on the cost side and the revenue share of 22H2 have all increased, but the reason can still be attributed to the epidemic. At least in 23, the revenue share of employee remuneration and rent is expected to improve. At the same time, if CPI remains stable, food costs are also expected to drop, and the overall profit margin level will pick up in '23.
Investment advice
The company's bottom line is expected to usher in a period of rapid growth. I am optimistic about the company's recovery in the post-pandemic era. The company maintained a certain pace of expansion during 22H2, and saw a high level of elasticity during New Year's Day in '23. We believe that Taiji's fundamentals are strong and that hot pot will soon enter a period of rapid growth. The current time point should remain optimistic. We are optimistic about the speed of the company's recovery in the pandemic era and the flexibility of its future performance. We expect the company's 23-25 revenue to reach 7554/104/123 billion yuan, and the net profit of non-GAAP net income of 683/1,08/1.4 billion yuan. The corresponding P/E is 35/22/17 times respectively, maintaining the “buy” rating.
Risk warning
Macroeconomic recovery falls short of expectations, leading to weak consumption, food safety incidents, etc.