Incident: The company released its 2022 annual report. It achieved operating income of 14.14 billion yuan in 2022, a decrease of 8.9% over the previous year, and achieved net profit of 750 million yuan to the mother, a decrease of 63.4% over the previous year. Looking at a single quarter, the company achieved operating income of 3.65 billion yuan in 2022/4, a decrease of 12.1% over the previous year, and achieved net profit of -570 million yuan to the mother. The loss margin increased year-on-year (-0.2 billion yuan in the same period last year).

Proprietary shopping malls are performing steadily, and their highly flexible business is awaiting recovery. By business, self-operated shopping malls: There was a net decrease of 1 in the company's own shopping malls. Among them, 1 new store was opened, 1 was closed, and 1 was managed. Self-operated shopping malls achieved revenue of 7.87 billion yuan in 2022, a decrease of 2.8% over the previous year, mainly due to the rent-free policy. Commissioned shopping malls: A net increase of 6 shopping malls was established, 12 new stores were opened, 7 were closed, and 1 was transferred to 1, achieving operating income of 2.38 billion yuan, a decrease of 27% over the previous year. This was mainly due to the decline in revenue from early brand consulting and commission management, commercial management consulting fees and business consulting fees for engineering projects. Construction and design: Achieved revenue of 1.23 billion yuan, a decrease of 17.7% over the previous year, mainly due to a decrease in the number of related projects. Home improvement and product sales: Achieved revenue of 640 million yuan, a year-on-year decrease of 54%, mainly due to a decrease in the number of related projects affected by macroeconomic fluctuations. Overall, the company's core self-operated shopping mall business performed steadily. The decline in overall revenue was mainly due to the decline in revenue from asset-light and highly elastic businesses such as managed shopping malls, construction and design, home improvement and product sales. We believe that as adverse external influences are weakened or even eliminated, the company's highly flexible business will usher in a rapid recovery, driving a rapid recovery in the company's overall revenue.

The asset-light strategy is beginning to bear fruit, and the effect of fee control is remarkable. In 2022, the company continued to focus on the strategy of “light assets, heavy operation, and reduced leverage” to improve operating efficiency. During the period, the cost rate fell 4.77 pp to 37.4% year on year. Among them, the company's sales expenses ratio, management expenses ratio, and financial expenses ratio were -2.3pp, -2.9pp, +0.5pp to 11%, 10%, and 16.4%, respectively, mainly due to the company's focus on reducing costs and increasing efficiency, controlling product promotion, and employee remuneration and benefits. Net interest rates fell 7.9 pp to 5.3% year over year, mainly due to the company being affected by macroeconomic fluctuations, which caused the company's investment real estate measured at fair value to loss of fair value changes and asset impairment losses due to loss of income rights related to Yintai's land consolidation.

The leading home furnishing position is stable, and precise operation cultivates internal skills. According to Frost & Sullivan's data, the company accounted for 19% of the retail sales market share of the Chinese home decoration and furniture shopping mall industry in 2022, up 1.5 pp from the previous year. The market share of the home decoration and furniture shopping mall industry (including chain and non-chain chains) was 8.4%, up 1 pp year on year, and the company's leading position remained unchanged. In addition, the company focused on precise operation, extended its main categories to ten categories in 2022, and accelerated the construction of themed pavilions. It has opened 32 No. 1 stores, 9 premium MALLs and 59 benchmark malls. The coverage rate of shopping malls nationwide in the catering category increased from 32% in early 2022 to 43% at the end of the year, and the food coverage rate of BaimALL shopping malls increased from 55% to 78%. We believe that as an industry leader, the company continues to further reduce costs and increase efficiency and improve operational efficiency, and it is expected that its profitability will gradually recover.

Profit forecasts and investment recommendations. Consumption in the real estate chain is picking up. The company, as a leading home furnishing company, has implemented the “light assets, heavy operation, and reduced leverage” strategy since 2021. It operates accurately, and its profitability is expected to be restored. The company's EPS is expected to be 0.45 yuan, 0.49 yuan, and 0.52 yuan respectively in 2023-2025. First coverage, giving a “hold” rating.

Risk warning: The risk of fluctuations in the real estate cycle, the risk that the expansion of managed stores falls short of expectations, and the profit and loss of changes in fair value exceeds expectations.