1H23, the company's comprehensive department store business format showed a restorative growth trend, with outlets leading the growth of department stores; the company card is located in the core business district of Shanghai and has obvious asset advantages. New store expansion and old store upgrades continue to advance, creating an excellent offline consumer experience through digitalization and store upgrades; policy documents on further recovery and expansion of consumption are expected to be issued, unleashing consumption potential; actively promoting publicly funded REITs projects to revitalize high-quality assets and optimize development strategies. We gave the company 2024E 30x PE valuation level, corresponding to the target price of 14 yuan, and maintained the “buy” rating.

Restorative growth continues under a low base, and the recovery trend continues, but consumer spending capacity and confidence still need to be further strengthened.

In 1H23, the company achieved operating income of 16.332 billion yuan/ -4.54%, down 11.28% from 1H21; gross profit margin of 26.56% /+3.23ppts, a slight increase of 0.08ppt compared to 1H21; realized net attributable profit of 328 million yuan, down 35.87% from 1H21; net attributable interest rate 2.01% /+2.54 ppts, down 1.53 ppts compared to 1H21; realized non-net profit of 273 million yuan, down 43.90% from 1H21; net interest rate deducted 1.67% /+2.43 ppts, down 0.97 ppt compared to 1H21. Among them, non-current profit and loss are mainly affected by changes in the fair value of transactional financial assets. In 2Q23, the company achieved operating income of 6.845 billion yuan/ +0.33%, down 15.18% from 2Q21; gross profit margin of 28.66% /+5.56 ppts, up 1.02 ppts from 2Q21; realized net attributable profit of 116 million yuan, down 51.29% from 2Q21; net attributable interest rate 1.70% /+7.07ppt, down 1.37 ppts compared to 2Q21; achieved non-net profit of 8.61 million yuan, down 63.87% from 2Q21; deducted non-net profit The interest rate was 1.18% /+5.20 ppts, down 1.59 ppts from 2Q21.

Overall, the retail market continued its overall recovery trend in the first half of the year, and the company showed a restorative growth trend; however, effective demand and market expectations were unstable, economic recovery momentum was weak, consumer spending capacity and consumer confidence still needed to be strengthened, and the foundation for recovering and expanding consumption needed to be further consolidated.

Ole led the restorative growth of comprehensive department stores, and the upgrading of old stores and the expansion of new stores continued to create an excellent shopping experience.

1) The company's core department store business has recovered significantly from a low base. Outlet revenue and gross profit levels have exceeded 2021, yet department stores and shopping malls still fall short of 2021 revenue levels. In 1H23, the company's department store/shopping center/outlet achieved revenue of 7.21/10.60/688 million yuan, respectively, +42%/+47%/+56%, compared to 1H21, respectively; gross margin was 26.88%/42.97%/75.37%, respectively, +4.85/+16.00/+10.54 ppts, compared to 1H21, +0.18/-2.16/-0.45 ppts, respectively. Among them, in the 2Q23 single quarter, the company's department store/shopping center/outlet achieved revenue of 339/508/326 million yuan, respectively, +165%/+195%/+102%, compared to 2Q21, -26%/-14%/+19%, respectively; gross margin was 30.06%/43.97%/73.16%, respectively, +10.35/+31.81/+15.67 ppts, compared to 2Q21. The company continues to promote the renovation and upgrading of stores and the construction of commercial landmarks, and expand the new Ole project. Bailian ZX, which opened in January 2023, positioned itself as the first two-dimensional commercial entity in China and was named as the top 10 commercial influence project in 2023; the first department store focused on brand adjustment, space efficiency, and introduced art exhibitions, performing arts and creative bookstores, with a significant influx of young visitors; Bailian Outlet (Qingdao, Jimo) officially opened on April 28, with 100+ well-known domestic and foreign brands. In the second half of the year, the company will focus on promoting the upgrading of Bailian Xijiao, No. 1 800, Oriental Commercial Building, and Qingpu Outlets, and promote the construction of commercial landmarks.

2) The supermarket industry recovered slowly, with a year-on-year decline under a high base: Lianhua Supermarket 1H23, a subsidiary of the company's supermarket business, achieved a turnover of 11.772 billion yuan/ -13.35%, a current loss of 709.86 million yuan, and a loss of 116 million yuan attributable to shareholders. Among them, supermarkets/convenience stores/large integrated supermarkets achieved revenue of 60.67/8.54/5.91 billion yuan, respectively, compared to +2%/+17%/-24%, compared to 1H21, and +11%/+3%/-26%, respectively. The decline in overall revenue in the supermarket business was mainly due to the high insurance supply business base for the same period in 2022 (2022 insurance and supply business sales exceeded 1 billion yuan) and the 2023 Spring Festival peak season was greatly affected by the epidemic. The supermarket industry also recovered slowly after the epidemic. Among units above the 1H23 limit, supermarket retail sales fell 0.4% year on year.

Expenses and operating conditions are generally stable, and cash flow continues to be optimized. 1) Company expenses fluctuated slightly: 1H23, the company's sales/management expenses rate was 15.54%/6.90%, respectively, +0.13/+0.10ppt, respectively, compared to 1H21, +0.36/+1.12 ppts; 2Q23, the company's sales/management expenses rate was 18.46%/8.25%, respectively, -0.28/-1.28 ppts, compared to 1H21, +1.50/+2.16 ppts, respectively. 2) The operating situation is generally stable, and cash flow continues to be optimized: 1H23, the company's inventory turnover days were 46.63 days/+3.32 days, up 7.08 days from 1H21; accounts receivable turnover days were 620 days/-1.82 days, down 1.33 days from 1H21; net operating cash flow was 1,913 million yuan/ +18%, up 78% from 1H21, mainly due to high tax expenses before the pandemic.

Continue to promote the REITs project to help separate important assets, and acquire all shares in Bailian Fashion to accelerate the development of buyer stores. 1) Continue to promote the REITs project: In July 2023, the company announced that another city in Shanghai will launch a public infrastructure REITs application and issuance for the project company. Shanghai Youyicheng Shopping Center 1H23 has assets of 646 million yuan, net assets of 449 million yuan, net profit of 49.95 million yuan, and excellent project quality. Issuing REITs will continue to optimize the company's return on investment evaluation indicators, enrich the company's project product format, promote the separation of important assets, and help diversify the company's business structure and profit model. 2) Acquire the remaining shares of Bailian Fashion to promote business collaboration: In August 2023, the company acquired 81% of the shares of Bailian Fashion (the Bálancing Buyer Store) held by the commercial investment group. After the acquisition was completed, Bailian Fashion became a wholly-owned subsidiary of Bailian Co., Ltd.

Since its establishment, Bailian Fashion has been nurtured and incubated for five years. Currently, it has three stores: Xuhui Oriental, Taikoo Hui Flagship, and Ganghui Henglong. It has accumulated rich brand resources and has entered a stage of steady development. After the acquisition, the Group will not only empower buyer stores to further enhance their competitiveness, but will also further empower the Group's existing department store retail format and further strengthen business collaboration.

Risk factors: Consumption recovery falls short of expectations; diversion pressure from online e-commerce platforms; increased competition in the industry; cultivation of new stores falls short of expectations; upgrade results of old stores fall short of expectations; major experiential consumer-side stores, or a decline in store efficiency; application for duty-free licenses is uncertain.

Profit prediction, valuation and rating: The company's asset advantages are obvious, and the upgrading of old stores continues to advance, expanding new retail formats such as Bailian ZX, expanding the outlet layout, and creating a high-quality shopping experience; policy documents on further recovery and expansion of consumption are expected to be issued to unleash consumption potential; actively promote publicly funded REITs projects to revitalize high-quality assets and optimize development strategies. Furthermore, in July 2020, the company submitted a license application for duty-free goods to the relevant departments. It is recommended to continue to pay attention to the approval of tax-exempt qualifications. Considering that consumer consumption has yet to increase further and that the company's operating conditions have not yet returned to pre-pandemic levels, we lowered the company's 2023/24/25 revenue forecast to 326.13/341.08/35.761 billion yuan (original forecast 353.06/384.03/41,992 billion yuan), and lowered the net profit forecast to 70/805/951 million yuan (the original forecast was 738/8.94/1,015 million yuan), and the corresponding EPS forecast was 0.39/0.45/0.53 yuan. The current price of comparable companies in the reference industry (Wangfujing, Hefei Department Store, China Free, etc.) corresponds to 2024E 20x PE. Considering that further expanded consumption policies are expected to be introduced, the company is actively promoting REITs projects to revitalize assets or further investment. In the duty-free business qualification application, the company is given a certain valuation premium, and the company is given 2024E 30x PE valuation level, corresponding to a target price of 14 yuan, maintaining a “buy” rating.