Event: The company released its semi-annual report for 2023. 1) 23H1 achieved revenue of 2,594 million yuan/ +27% (same year on year, same below), and adjusted net profit of 70 million yuan, a sharp reversal of losses from 22H1's -249 million yuan.

2) Store operating profit is 473 million yuan/ +142%, and operating profit margin is 20.1% /+9.7pct. 3) Operating cash flow of 408 million yuan/ +296%.

The main tea beverage business is growing steadily, and new retail performance is impressive. 1) Performance by brand: Nai Xue Tea Drink Shop has revenue of 2.354 million yuan, accounting for 90.8% /-1pct. It is the company's business center. Bottled beverage revenue is 157 million yuan/ +84%, accounting for 6% /+1.8 pct, table cover revenue of 33 million yuan/ -24%, and new retail revenue of 50 million yuan/ +31.5%.

2) Performance by business line: Ready-made tea revenue is 1,905 million yuan/ +29%, revenue accounts for 73.5% /+1.5 pct, bakery products revenue 366 million yuan/ -4%, revenue accounts for 14.1% /-4.5 pct.

3) Performance by revenue source: Store orders/ self-pick-up orders/ takeout orders accounted for 15%/41%/44%, with year-on-year changes of 4.9 pct/+5.6 pct/-0.7 pct. Among takeout orders, third-party takeaway platforms accounted for 37% of revenue and self-operated platforms accounted for 6.9% of revenue. 4) As of 23H1, the number of company members was about 66 million/ +36%, the total number of monthly active members was about 4.3 million, and the monthly repurchase rate was about 23%.

H1 is steadily opening stores, opening up business partnerships, and H2 store encryption is expected to accelerate. By model, as of 23H1, the company had a total of 1,194 stores/+34%, of which 975/ +27% were first-class tea shops and 219 second-class tea/ +60%. By city line level, the number of first-tier, new first-tier, second-tier, and other city stores was 414/410/266/104, respectively, with a year-on-year difference of +34%/37%/+27%/21%, with stores accounting for 35%/34%/22%/9%, respectively. Nai Xue acquired Lele Tea in December 2022, optimized the competitive landscape, and passed the Lele Tea test to join in April 2023. The first batch of franchise stores entered the market on August 18.

In July 2023, the company announced that the Nai Xue brand would start a business partnership business and maintain low product prices to help penetrate the low-tier market. Combined with the company's goal of opening 600 new stores throughout the year (first half of the year), store expansion is expected to accelerate in the second half of the year.

Daily sales in non-first-tier cities are close, and there is still room for profit improvement for stores in the north. Operating profit margin by market performance:

The daily sales of a single store in the first-tier, new first-tier, second-tier, and other cities were 1.38/1.07/107/10,800 yuan, respectively, and the profit margin for store operations was 21%/20%/20%/22%, respectively. The daily sales of single stores in Shenzhen/Shanghai/Guangzhou/Wuhan/Xian/Beijing was 1.59/1.21/1.20/1.10/1.38/12,500 yuan. The store operating profit margins were 24%/17%/21%/22%/27%/15%, respectively.

The cost control effect is remarkable, and the single-store model continues to be optimized. The unit price of the 23H1 Ni Xueke is 32.4 yuan (22H1 is 36.7 yuan), and the daily order volume is 363 orders (22H1 is 346 orders). The gross profit margin at the store level is 70.4% /+0.6 pct, labor costs account for 19.6% /-6.4 pct, rent costs account for 14.4% /-1.6 pct, takeout deductions 8% /-0.5 pct, utility expenses account for 2.7%, depreciation and amortization 5.6% /-0.6 pct, and store operating profit margin 20.1% /+9.7 pct.

Investment suggestions: The company is a leading high-end tea chain brand. The acquisition of Lele Tea optimizes the competitive pattern, optimizes the single-store model, drives the company's performance to reverse losses, reduces prices and opens up franchise paths to open up room for growth. According to Wind's unanimous expectations, the company's net profit for 2023-2025 was 262 million yuan/569 million yuan/832 million yuan, respectively, and the corresponding PE at the closing price on September 1, 2023 was 29/13/9 times, respectively.

Risk factors: Industry competition is intensifying, opening stores falls short of expectations, and franchisee management risks.