Incident: Helens released its 1H23 earnings report on August 25. Revenue was 7.1 billion yuan, down 18.7% year on year; gross margin was 72.3%, up 6.3 pct year on year; adjusted net profit was 180 million yuan, with an adjusted net interest rate of 25.0%. Both revenue and profit are in line with profit guidelines. The company will pay an interim dividend of 0.1162 yuan/share, totaling 150 million yuan.
Comment: Single-store daily sales are gradually recovering, and joining is injecting new momentum. (1) Source of revenue:
Proprietary products accounted for 76.3% of revenue, an increase of 0.5 pct over the previous year, of which alcohol from its own beverages accounted for 42.4%, an increase of 5.2 pct over the previous year; direct management between different business formats was still the main source of revenue, but franchises increased rapidly, and the share of revenue increased 5.4 pct to 5.5% year on year. Single store daily sales (2) segment level: average daily sales of 0.82 million yuan per store, up 14% year on year; among them, first-tier, second-tier, third-tier urban taverns and below had average daily sales of 0.84/0.3/0.79 million yuan, up 15%/26%/0% year on year; (3) Sub-model: directly-managed taverns had average daily sales of 0.79 million yuan, up 10% year on year; franchised taverns sold 0.900 million yuan per day; (4) Same store: 188 same-store stores had an average daily sales of 11,600 yuan, up 0.1% year on year, and higher than the average daily sales of 4 stores 1.7%
Direct loss-making stores continue to shut down, and the business model favors franchise. The company opened 25 new taverns in 1H23 and closed 139. At the end of the period, the total number of taverns was 653. (1) Sub-level: In addition to 2 overseas rooms, first-tier, second-tier, third-tier cities and below each had 63/314/274 rooms, a decrease of 17/58/40 rooms each from the end of '22. As of August 25, the total number of pubs was 562, and 91 were further adjusted in July-August. (2) Sub-model: 515/138 directly-operated/franchised pubs, each change from the end of '22 - 138/24 rooms, and 425/126 rooms each as of August 25.
The new Hi-Beer Partner model was introduced, and the first batch of stores performed excellently. Since the launch of the Hi-Beer Partner Program in June, the company has fully mobilized high-quality resources from the community, achieved better site selection at a lower cost, and store expansion is expected to accelerate. On July 25, the first store opened in Xiushui, Jiangxi.
As of August 25, there were a total of 11 Hi Beer stores, with 90+ contracts signed. The average daily efficiency of a single store was 2.6 times that of a newly opened pub in 1H23. The store's capital guarantee point was significantly reduced, and the store operating profit margin increased dramatically.
The overall profit structure has improved. (1) Gross profit margin: 1H23 was 72.3%, an increase of 6.3 pct over the previous year. This was mainly due to a decrease in marketing activities due to the increase in the share of sales of new beverage-based alcoholic beverages with high gross profit, as well as a recovery in overall performance after the pandemic. Among them, the gross margin for owner/third party alcohol consumption was 79.4%/55.6%, each up 0.7/7.1 pct over the previous year. (2) Expenses: After deducting share payments, the labor cost rate was 23.9%, down 7.8 pct from the previous year; the depreciation fee rate for right-to-use assets was 8.6%, down 9.4 pct from the previous year, mainly due to the shutdown of the tavern's lease contract.
Valuation forecast: Based on the company's adjustment strategy, contraction of direct management, and light asset management as the main future development direction in the future, we lowered the company's 23-25 revenue by 42.6%/47.7%/47.9% each to 1,44/16.0/1.87 billion yuan each; adjusted net profit of 3.6/4.6/588 million yuan each (originally 3.8/65/850 million yuan), and adjusted net interest rate of 25.3%/28.7%/31.3% each. We gave the company a valuation of 25 times PE in 24 (originally 30x in 2024), corresponding to a target market value of HK$12.7 billion, and lowered the target price by 43% to HK$10.1 (corresponding exchange rate was HKD/CNY = 0.9, previously target price of HK$17.8), maintaining a superior market rating.
Risks: Consumption recovery falls short of expectations, pub expansion falls short of expectations, and industry competition intensifies.