Performance review

Results for the first half of fiscal year 2024 are in line with market expectations

The company announced results for the six months ended September 30, 2023: revenue of 35.77 billion yuan, a decrease of 11.9%; net loss of 360 million yuan (net loss of 0.7 billion yuan for the same period last year), corresponding to a net loss of 0.04 yuan per share, in line with the company's previous profit forecast and market expectations.

Development trends

1. Revenue is under pressure due to the contraction of the insurance and supply business and increased competition. In the 1HFY24 period, by business type, 1) Product sales revenue was 34.23 billion yuan, a decrease of 12.4%, of which -5.9% (excluding home appliance sales, pick-up vegetables, and Tmall shared inventory sales), mainly due to the decline in CPI for pork and fresh vegetables, contraction in insurance and supply business, etc.; from volume and price splitting, benefiting from channel normalization, 1HFY24 offline passenger flow and online B2C average daily passenger flow increased year-on-year. However, per-customer price consumers were under pressure due to declining demand for stocking. On a quarterly basis, the same store in Q1 and Q2 was -8.5%/-3.5% respectively, showing an improving trend from month to month.

2) Rental income was 1.54 billion yuan, an increase of 1.0%. Mainly due to the optimization of the tenant structure, the vacancy rate fell to 4%. In terms of exhibition stores, during the 1HFY24 period, the company opened new hypermarkets, the Chinese Super League, and M member stores on 3/7/1, and closed 2 hypermarkets, and closed 2 hypermarkets for a short period of time due to the transformation of member stores.

2. Gross margin is relatively stable, and pressure on the cost side is dragging down profit performance. The 1HFY24 gross margin remained flat at 24.9% yoy. On the cost side, the sales expense ratio also increased by 1.3ppt to 24.4%. We expect some operating expenses and marketing investment to be relatively rigid, mainly due to pressure from the same stores and increased market competition; the management expense ratio was 2.5%, which remained stable over the previous year. The company continues to promote cost reduction and efficiency. Out of 1HFY24 sales and management expenses, personnel expenses were reduced by 405 million yuan. At the same time, the company is also driving the optimization of store employment models through digital transformation. Under the combined influence, the net interest rate of 1HFY24 was also reduced by 0.8ppt to -1.0%.

3. Store optimization and member store expansion are progressing steadily, and focus on the progress of business transformation. 1) Store optimization:

In the first half of the fiscal year, the company completed the restructuring of 8 stores, projects and partial transformation of more than 50 stores, enhancing the healthy and happy experience of the shopping scene and enhancing its appeal to consumers; 2) Member store construction: Since the opening of the M member store in Yangzhou in April, the number of paid members has exceeded 50,000, and the total number of members is nearly 100,000; the company announced that the Changzhou member store will open in December, and the Nanjing member store will open in January next year. Currently, two new stores have opened online delivery ahead of schedule; 3) Supply chain construction: The company's own brand building is progressing steadily, and 100 models have been developed by 1+HFY24 Own Brand products have a penetration rate of 10% in all categories, which is conducive to enhancing the differentiated appeal and profitability of products. Continue to pay attention to the results of business transformation and upgrading.

Profit forecasting and valuation

Considering the intense competition in the industry, the revenue forecast for the 2024/25 fiscal year was lowered by 7%/7% to 782/80 billion yuan, and the net profit forecast was lowered from 17/43 million yuan to -1.5/320 million yuan respectively. The current stock price corresponds to 0.2/0.2 times P/S of the 2024/25 fiscal year. Maintain an outperforming industry rating. Taking into account adjustments in profit forecasts and changes in market risk appetite, the target price was lowered by 32% to HK$2.3, corresponding to 0.3/0.3 times P/S in fiscal year 2024/25, with 46% room for growth.

risks

Competition in the industry has intensified; online business growth has fallen short of expectations; and new business development has fallen short of expectations.