We are optimistic about the opportunities of the entire offline cycle. Jiajiayue has become the vanguard of retail industry reform. Haohui Xinghard Discount Supermarket+Yueji Snacks officially launched. As of Q3, there were 15 Yueji snack stores and 3 Haohuixing discount supermarkets. Haohuixing discount supermarkets have a smaller store area, and prices are 10%-15% lower than regular stores. They select SKUs, focus on their own brands and customized products, and build their own logistics system. Competitors quickly followed suit. Since Fat Donglai and Wumei began the discount revolution, the Hema Zero Supply Conference announced the transformation discount, and Yonghui opened a genuine discount store in October.
A different view from the market: the market believes that hard discount supermarkets started late, development uncertainty is high, and there is a risk of a price war in the future. We believe that in a macro context where the economy is moving towards maturity, the growth rate is slowing down and the rate of price growth is slowing down, e-commerce has taken the first step to establish a price comparison system and cost performance mentality. Vertical discount business formats such as mass sale of snacks have already been completed, and the discount transformation trend of traditional offline retail is the general trend. On the value side, the availability of hard discount supermarkets is similar to convenience stores and community supermarkets. Upstream has opened up the path that previously required a factory to go from one batch of merchants to two batches to retailers to maximize value compression and reduce the channel price increase ratio. The profit model relies on low gross profit to drive high turnover to drive an increase in ROE, and the sharing of labor and rent guarantees the net interest rate under high floor efficiency. Hard discount supermarkets have high entry barriers. Through their own brands and supply chains, they achieve comparative price advantages, and achieve economies of scale to lock in customers.
Growth assessment: Germany's ALDI defeated Walmart to achieve a leading position through 90% of its own brands, selected SKUs, and rapid expansion of supply chain upgrades. From a domestic perspective, the pre-sale business of hard discount supermarkets (such as vertical hard discounts selling snacks) has rapidly expanded under capital and franchise leverage, and the leaders have begun to integrate. As a post-purchase business format with more complete categories, more choices, and higher supply chain requirements, hard discount supermarkets are driving more slowly in the early stages of growth, but the potential and barriers after gaining momentum will be far stronger than single product hard discounts, and it is expected that the existing traditional retail industry will be transformed and upgraded.
Looking at the Jiajiayue moat from four dimensions: direct procurement+logistics+own brand+store operation to transform the zero-supply relationship.
1. The agricultural product supply chain is complete, the proportion of direct procurement is high, and the superposition processing capacity is strong. Product premiums and transportation losses are greatly reduced, and the ratio is higher than that of direct social fresh procurement. 2. The logistics construction is complete, and the in-house logistics center is large in scale and covers a wide area. 3. The share of own brands is higher than that of competitors, enhancing existing competitive advantages and feeding back the discount industry. 4. Strong operating capacity and refined store management.
The recovery of the main business can be expected: CPI suppressed the increase in customer unit prices in 2023, and the same stores are expected to pick up in 2024. The certainty that the company's net interest rate will increase is high; the market is developing rapidly in the small business format, the market is developing rapidly, the regional economy of scale plus the rise in rent costs is slower than the rise in labor costs, and there is still room for development within the province. Outside the province, it has the ability to reverse losses and integrate mergers and acquisitions.
Profit forecast: The company is expected to achieve operating income of 191.01/201.22/21,226 billion yuan in 2023-2025, a year-on-year increase of +5.04%/+5.35%/+5.49%; net profit for 2023-2025 is 2.98/3.45/435 billion yuan, +451.54%/+15.64%/+26.22% year-on-year. Considering the company's growth and the possibility of faster opening of stores in the future, the discount business format brings room for growth beyond expectations, giving the 2024 target PS 0.6X, corresponding to a market value of 121 billion dollars, a target space of about 30%, and maintaining a “buy” rating.
Risk warning
CPI affects customer unit prices, new business formats fall short of expectations, food safety issues