1H23 performance is basically in line with our expectations

The company announced 1H23 results: revenue of 2,594 million yuan, +26.8% year-on-year, net profit of 66 million yuan, adjusted net profit of 70 million yuan (corresponding net interest rate of 2.7%), reversing losses year-on-year. The performance was basically in line with our expectations. The average order price of 1H23 was about -11.7% year on year, and the average daily order volume was about +5% year on year. As of the end of June 2023, there were 1,194 tea and tea drinking shops in Nai Xue, with a net opening of 126 stores in 1H23.

The average unit price fell, the gross margin remained stable, and the profit margin of stores increased. With the share of low-priced products increasing and the average price of 1H23 falling, gross margin remained at 68.2%, which was basically the same as the previous year. At the store level, benefiting from cost reduction and efficiency increase, 1H23 Naxue Store OPM was +9.7ppt to 20.1% year on year (of which manpower 19.6%, year-on-year -6.4ppt; actual rent 14.4%, year-on-year, -1.6ppt; takeout expenses 8.0%, year-on-year -0.5ppt; other discounts were 5.6% yoy, -0.6ppt). The store profit margin and labor and rent cost ratio reached the company's previous guidelines, but due to overall revenue pressure, relatively rigid headquarters expenses, RTD business expenses, etc., 1H23's net interest rate fell short of the 5% target previously set by management for the whole year. Branch store model: Class I stores have average daily sales of 12,300 yuan/store operating profit margin of 20.4%, category II stores average daily sales of 0.93 million yuan/store operating profit margin of 22.0%. First-tier cities: Shenzhen has an average daily sales of 17,700 yuan/store OPM of 24.8%, higher than Guangzhou (12,800 yuan/ 20.2%), Beijing (13,300 yuan/ 14.6%), and Shanghai (12,700 yuan/ 15.6%).

Development trends

In the future, we may increase the promotion of low-priced products; pay attention to the progress of the recovery in daily sales. In order to better adapt to the current consumption pressure environment and boost customer flow, we observed that Nai Xue launched a 9.9 yuan fresh milk tea purchase campaign in August, further increasing the proportion of products under 20 yuan (we estimate that currently over two-thirds of drinks are in the 9-19 yuan price range). We estimate that Nai Xue's average store efficiency in July was basically the same as in 2022 and recovered to about 70% in 2021; the average same-store efficiency in August recovered about 85% compared to 2022.

Follow the progress of the business partnership model. On 7/20, the company announced the opening of a business partnership model, which mainly targets low-tier cities with few direct stores. Store types and products are consistent with direct-run stores. In terms of profit model, the company charges one-time revenue, operating service fees of 1% of monthly turnover, and supply price difference (the company expects the gross margin of partner stores to be about 60% vs. gross margin of directly managed stores of about 68%). The company expects franchise stores to reach a store profit margin of 20% or more, and the payback period is within one and a half years. The company plans to open the first batch of franchise stores within the year, and plans to open 3,000 franchise stores in the next two years1. It is recommended to pay attention to the progress of franchise store opening and marginal contribution to profits. Furthermore, by the end of August, the company's directly-managed stores had signed contracts with nearly 500.

Profit forecasting and valuation

Maintain adjusted net profit forecasts for 2023 and 2024. The current stock price corresponds to 14 times P/E in 2024. Maintaining a neutral rating, taking into account the uncertainty brought about by category competition on store efficiency and expansion, the target price was lowered by 18% to HK$5.30, corresponding to 15 times P/E in 2024, with 10% upside.

risks

The recovery in store efficiency fell short of expectations, the expansion of stores fell short of expectations, and the improvement in net interest rates fell short of expectations.