The company released its 2022 annual report on April 29. Revenue achieved in 2022 was 90,091 billion yuan, a year-on-year decrease of 1.07%; total profit - 3,218 million yuan, a year-on-year loss of 31.84%; the net profit of the mother was 2,763 million yuan, a year-on-year loss of 29.94%, after deducting non-net profit - 2,565 million yuan, a year-on-year loss of 33.08%. Diluted EPS -0.30 yuan, return on net assets -30.21%. In 2022, the company bought back 263 million yuan of shares, which was treated as a cash dividend. Given two consecutive years of losses, no additional cash dividend will be distributed in 2022.
The company released the first quarter report of 2023 on April 29. The first quarter achieved revenue of 23.802 billion yuan, a year-on-year decrease of 12.63%, and the net profit of the mother was 704 million yuan, an increase of 40.24% over the previous year, after deducting non-net profit of 618 million yuan, a year-on-year decrease of 1.58%.
Brief review and investment advice.
We believe that compared with net profit, gross margin is a core indicator that better reflects the company's business strategy and profit stability. The company's 1Q23 gross margin has slightly exceeded pre-epidemic (1Q19) and has the basic conditions for continued profit. It is recommended to track same-store trends and expense indicators in subsequent quarters. We expect that with the full launch of the YHDOS system and the continuous strengthening of the digital supply chain, the company is expected to reach an inflection point of reducing costs and improving efficiency starting in 2023.
1. Revenue in 2022 was 90.1 billion yuan, a year-on-year decrease of 1.07%. Revenue in 2022 was 90,091 billion yuan, a year-on-year decrease of 1.07%, mainly due to changes in domestic and foreign social and economic environments in 2022, changes in consumer consumption habits, and limited spending capacity. Among them, the 1-4Q increased by 3.45%, 4.86%, -3.62%, and -9.62%, respectively. By product: Fresh and processing revenue decreased 2.27% year on year, food products (including clothing) revenue increased 0.22% year on year, accounting for 47.4% and 52.6% of main revenue, respectively.
Decelerate and optimize store opening. In 2022, 36 new Bravo stores were opened, 60 were closed, 10 new stores were signed, and 111 reserve stores were stored. The total number of stores at the end of 2022 was 1,033. The company began an era of store iteration by selecting+selecting high-quality store properties and eliminating the closure of some of the final stores.
Two new stores were opened in the first quarter of 2023.
2. Gross margin increased by 0.97 pct in 2022. The full-year consolidated gross profit margin increased by 19.68% year-on-year by 0.97 pct. By product, the gross margin of fresh and processed products increased by 1.09pct to 12.45%; the gross margin of food products increased by 0.79pct to 16.04%. Subregionally, in 2022, in addition to the company's gross margin falling by 0.05 pct in West China, the company's gross margin increased in Southeast, North China, East China, Southwest China, South China, and Central China, with increases of 1.20, 2.11, 1.60, 0.12, 1.19, and 0.84 pct respectively over the previous year.
3. Cost rate reduced by 0.7 pct during 2022. The fee rate during 2022 was 22.11%, a decrease of 0.7 pct over the previous year. Among them, the sales expense ratio was 17.59%, a decrease of 0.67 pct over the previous year; the management expense ratio was 2.27%, a decrease of 0.1 pct over the previous year; the financial expense ratio was 1.71%, which was basically the same as the previous year; and the R&D expense ratio was 0.53%, an increase of 0.06 pct over the previous year.
4. A decline in revenue, changes in fair value profit and loss, and impairment of accrued assets led to a loss of $2.8 billion in 2022. The fair value of financial assets fell 509 million yuan from the beginning of the year, investment losses from disposal of financial assets were 115 million yuan, long-term equity investments accrued impairment of 197 million yuan, asset impairment preparations for long-term losses and preparations for closing stores were 437 million yuan, total profit in 2022 was 3,218 million yuan, effective income tax rate was 6.80%, and net profit returned to the mother was 2,763 million yuan, a year-on-year loss of 29.94%, net profit was -2,565 million yuan, a year-on-year loss of 33.08%.
5. 1Q23 revenue fell 12.6%, and net profit to the mother increased by 40.2%. In the first quarter of 2023, the company achieved revenue of 23.802 billion yuan, a year-on-year decrease of 12.63%. We think this was mainly due to the combined impact of the shortened peak season before the Spring Festival and the high insurance supply base in March '22. The gross profit margin for the first quarter was 22.88%, an increase of 1.6 pct over the previous year, and the cost rate for the period was 19.61%, an increase of 1.29 pct over the previous year. Net profit for the first quarter was 704 million yuan, an increase of 40.24% over the previous year, after deducting non-net profit of 618 million yuan, a year-on-year decrease of 1.58%. Net cash flow from operating activities was $1,096 million, a year-on-year decrease of 57.66%.
6. Deeply cultivate digitalization and supply chain to promote omni-channel business strategy transformation (1) Omni-channel strategic transformation. In 2022, the company's online sales were 15.936 billion yuan, accounting for 17.69%, with an average daily order volume of 518,000 orders. Among them, the self-operated home-delivery business “Yonghui Life” had sales of 8.8 billion yuan, an increase of 24% over the previous year, with an average daily order volume of 316,000 orders. At the end of 2022, it had covered 984 stores, the number of members exceeded 101 million, and the average number of online activities was 12.6.07 million. The third-party platform's door-to-door business covers 958 stores, with sales of 7.12 billion yuan and an average daily order volume of 202,000.
(2) Digital construction. The YHDOS system was set up to fully implement online and online business. All store switching was completed by December 31, '22, forming comprehensive online business governance and digital governance. Before March 31, 2023, it is necessary to achieve all store backstore-to-home warehouses, product inventory, shelf stacks, purchase orders, employee tasks, and organizational performance, all included in the digital management of YHDOS.
(3) Deepen the supply chain with fresh food characteristics. Optimize procurement models based on long and short radius mechanisms, promote standard product construction, prepared food projects, etc. to guarantee product strength and promote business growth. Continuously enhance medium- to long-term supply chain capabilities through the application of technological tools, optimization of supply chain processes and mechanisms, and the strengthening of fresh talent cohorts. Optimize the supply chain from a differentiated perspective; in 2022, private brands eliminated 54 suppliers and introduced more competitive and innovative suppliers; focused on 122 key development products throughout the year, accounting for 50% of sales. Private label sales reached 3.27 billion yuan in 2022, an increase of 23.40% over the previous year.
(4) Development strategy and 2023 business plan. ① Promote the digitization of the commodity supply chain and build a sunshine supply chain. Empowered by technology and data, formulates category management rules, clarifies category development goals and positions, and survives the fittest of categories. ② Open high-quality stores, close and eliminate last-end stores, start store iteration and optimization; build benchmark stores with consumer reputation and market influence in the new era. ③ Continuously improve the user experience, promote the in-depth and broad development of the self-operated platform - Yonghui Life, explore potential customers, accelerate the transformation of “Yonghui Life” warehouses, and strengthen digital product capabilities.
Maintain judgment on the company. We believe that the company's gross margin has improved markedly since 2022. It is recommended that follow-up attention be paid to same-store trends and profit recovery elasticity under cost reduction and efficiency improvement. ① Store optimization: The company started an era of store iteration by selecting+selecting high-quality store properties and eliminating the closure of some end stores, slowing down the speed of opening stores, but improving the quality of stores; ② Strengthening the fresh food supply chain: vertical management of the fresh food sector, adopting a long and short radius mechanism, and building its own platform “Fuping Supply Chain” to increase the penetration rate of direct procurement from the source; food products strengthened collaboration with brands. ③ Build a digital platform: Complete the full launch of the YHDOS system in 2022 to improve the efficiency of digital operations throughout the process.
Updated profit forecast: We expect net profit of 451 million yuan (-13.4%), 997 million yuan (-4.4%), and 1,193 million yuan for 2023-2025, up 116.3%, 120.9%, and 19.6%, respectively; the current market value corresponds to 2023-2025 PS 0.35 times, 0.33 times, and 0.32 times, respectively. Considering that the company's net interest rate is still in the early stages of recovery, we maintain the PS valuation method, giving 0.5 times PS in 2023, corresponding to a reasonable market value of 43.9 billion yuan (-9.3%) and a target price of 4.84 yuan (-9.4%), maintaining an “superior market” investment rating.
Risk warning. Uncertainty about online business, increased competition in the industry, uncertainty about investment returns and impairment losses.