Introduction to this report:

H1's overall performance is relatively good, demonstrating operational resilience. Driven by a series of measures such as store adjustments and upgrades, digital capacity building, and supply chain optimization, etc., it is optimistic that profitability will further recover and revenue and profit will continue to improve.

Key points of investment:

Maintain an increase in holdings. H1's revenue was 6.232 billion yuan/ +0.01%, net profit attributable to the mother was 215 million yuan/ +34.1%. After deducting a loss of less than 139 million yuan, it turned a loss into a profit. Slightly lower expectations were pressured by supermarkets and other business formats. Considering that it will still take time to repair the supermarket business, the EPS forecast for 2023-25 was lowered to 0.26/0.31/0.37 yuan (originally 0.42/0.49/0.55) growth rate of 153/20/ 17%, and the target price was lowered to 7.28 yuan to maintain the increase in holdings.

Profitability has rebounded, and operating cash flow has improved dramatically. 1) Q2 had revenue of 2,847 million yuan/ +2.81%, net profit from return of 0.07 billion yuan, less than -33 million yuan, and there was some overall pressure; 2) H1 buying/supermarket revenue growth rate +8.17%/-2.74%, comparable store revenue growth rate +6.76%/-2.74%, total profit growth, respectively, +85.8%/-7.35%; 2) H1 overall gross profit margin rate of 37.94% /+1.54pct, retail gross profit margin 36.22% /2.02pct, catering industry gross margin rate 36.22% /2.02pct The gross margin of the supporting category has increased a lot ; Overall net interest rate of 3.43% /+0.86pct; 3) The cost rate for the period was 35.55% /-1.26pct, mainly due to a decrease in sales and financial expenses; 4) Net operating cash flow of 846 million yuan/ +47%

The stores have been further adjusted and upgraded, and the online development has been smooth. 1) H1 opened 1 new store and closed 3. As of H1, 101 stores were purchased (6 franchises, managed and exported), 117 supermarkets (31 independent supermarkets), with a total area of about 4.57 million square meters; 13 reserve projects have been signed to be opened (109 purchases, 4 independent supermarkets); 2) H1's online product sales and digital service revenue GMV is about 2.76 billion yuan. Among them, supermarkets have increased 6.7% in sales, accounting for 21.5% of sales. It accounts for over 22%.

Promote digital capacity building and continue to polish an advantageous supply chain. 1) Using AI technology from Lingzhi Mathematics to provide point-of-sale labels for products, nearly 50% of products have been launched, and will gradually expand to all categories in the future; 2) Continuously optimize member rights, coordinate marketing and accurate population classification, and the overall number of digital members exceeds 44.73 million; 3) Continuously strengthen the construction of strategic core product groups, and sales of strategic core product groups have increased by 2%; 4) Self-owned properties account for relatively high levels and are located in the core areas of various cities, hoping to benefit from the REITs policy.

Risk warning: door-to-door business, store upgrades, digital capacity building falling short of expectations, etc.