1H23 performance fell short of our expectations

The company announced 1H23 results: realized revenue of 580 million yuan, same decrease of 3.0%, net profit of 110 million yuan, same drop of 40.6%, lower than our expectations, mainly due to property leasing and management service repairs falling short of expectations. After deducting non-net profit of 60 million yuan, the same decrease was 51.0%. Non-recurring profit and loss mainly came from impairment of receivables and preparations for reimbursement. On a quarterly basis, Q1 and Q2 revenue were -9.9%/+6.8% year over year, and net return interest rates were 38.6%/-5.0% respectively. The profit side for the second quarter was under pressure month-on-month.

Development trends

1. The main business was under pressure in the first half of the year, and the transformation business performed well. By business, 1) Property leasing and management: revenue fell 31.6% to 280 million yuan, mainly because the company continued its rent and property management fee relief policy to boost market operators' confidence, and increased support for market operators; 2) Retail and supporting property sales: achieved revenue of 150 million yuan, an increase of 269.7%; 3) Product sales: achieved revenue of 0.3 million yuan, a decrease of 19.2%; 4) Health and medical services: achieved revenue of 0.3 million yuan, same increase of 50.3%. Rehabilitation Hospital and Yihe Homeland continued to enhance the quality of medical and nursing services; 5) Financial services; 5) Financial services Achieved revenue of 50 million yuan, a year-on-year increase of 82.3%.

2. Gross margin is under pressure, and increased marketing efforts are driving up sales rates. The company's 1H23 gross margin was 42.4%, year-on-year -5.6ppt, mainly due to an increase in sales carry-over costs for stores and supporting properties. On the cost side, during the 1H23 period, the cost rate increased by 6.3 ppt to 16.3%, of which the sales cost rate also increased by 3.0 ppt to 6.4%, mainly because the company increased marketing activities to stimulate market vitality; the management+R&D expense ratio increased by 0.4ppt to 9.1%; and the financial expense rate increased by 2.9 ppt to 0.9%, mainly due to the increase in interest expenses. Under comprehensive influence, 1H23's net interest rate also fell 11.9ppt to 18.9%.

3. Focus on the transformation of the main leather business and the progress of business diversification. 1) Main business transformation: The company gradually promotes the digital transformation of its main business, improves the layout of live streaming platforms such as Douyin and Taobao and multi-dimensional e-commerce platforms, and optimizes the e-commerce ecosystem. In terms of industry promotion, the company launched the “Chaolai” industrial integrated service platform in June to provide multi-dimensional support covering industry, retail and wholesale, and explore a business model combining “display+order”. 2) Business diversification: In terms of health and medical services, the company is gradually strengthening the quality of medical services and building a quality service brand. In the financial business sector, the company's Civil Finance Center, Guarantee Company, and Chuangjia Company provide diversified financing for the upstream and downstream of the industry on the basis of strengthening risk management. Keep an eye on the subsequent progress of business diversification.

Profit forecasting and valuation

Considering the progress of downstream demand restoration and the impact of the company's investment in marketing, etc., we reduced the 2023/24 net profit by 11%/11% to 23/230 million yuan, respectively. Maintain a neutral rating. Based on profit forecast adjustments and considering the company's business transformation progress, the target price was lowered by 6% to 4.5 yuan, with 6% room for decline.

risks

Downstream consumer demand, industry competition intensified; online transactions were diverted; and the Big Health business fell short of expectations.