The company released its report for the third quarter of 2023: revenue for the third quarter of 2023 was 3,020 billion yuan, up 0.96% year on year; net profit to mother was 9.93 million yuan, up 121.81% year on year, after deducting non-net profit - 17.49 million yuan, a year-on-year loss reduction of 78.78%. Diluted EPS of 0.01 yuan, weighted average return on net assets of 0.24%. Net operating cash flow for the first three quarters was $2.145 billion, up 30.65% year over year.

Brief review and investment advice:

Sales of 1 and 3Q23 were nearly 8.9 billion yuan, up 5.6% year on year; revenue of 3,020 billion yuan, up 0.96% year on year; of these, sales of comparable stores were 8.2 billion yuan, up 6.23% year on year; revenue was 2,824 billion yuan, up 1.55% year on year.

(A) By business category, ① Purchase 100:3Q23 sales increased 10.08% year over year to 6.379 billion yuan, operating income increased 10.31% year over year to 1,021 billion yuan; sales, operating income, and total profit of comparable stores increased 9.58%/10.28%/111.08% year on year. ② Supermarkets: 3Q23 sales fell 2.20% year on year to 2,288 billion yuan, revenue decreased 2.48% year on year to 1.955 billion yuan; total revenue and profit of comparable stores decreased 2.56%/37.41% year on year, and gross margin decreased 0.62 pct to 23.23% year on year.

(B) By region, 3Q23 South China comparable store revenue increased 1.80% year on year to 1,874 billion yuan, and total profit increased 29.73% year on year; revenue of comparable stores in central China fell 1.20% year on year to 583 million yuan, and total profit increased 34.25% year on year. In addition, revenue from the main business in Southeast China, and Beijing increased by 1.17%, 6.19%, and 11.91%, respectively.

2. In 3Q23, 1 new supermarket was opened and 2 stores were closed to buy 100. Furthermore, the company stopped operating Tianhong Hi-Tech Mall in Chengdu, Sichuan Province on October 21. By the end of 3Q23, the company had entered 34 cities in 8 provinces/cities in Guangdong, Jiangxi, Hunan, Fujian, Jiangsu, Zhejiang, Beijing and Sichuan, with a total of 99 retail stores (including 5 franchises, management and export), a net decrease of 3 from the beginning of the year. Among them, there were 46, 25, 8, 7, 3 stores each in the supermarket business; 117 stores in the supermarket business (including 31 independent supermarkets), a net decrease of 2 from the beginning of the year Among them, there are 64 and 28 comparable stores in South China, Central China, Southeast China, East China, Beijing, and Chengdu , 6, 5, 2 houses. The total area of the company's various business formats was 4.49 million square meters, down 3.68% from the beginning of the year.

3. Net profit to mother increased by 121.81% to 9.93 million yuan in 3Q23. 3Q23 operating profit of 1.06 million yuan reversed losses, net income from fair value changes of 27.14 million yuan, credit impairment losses of 1.72 million yuan, asset disposal income of 64.87 million yuan, and other income of 8.39 million yuan. The final net profit for 3Q23 was 9.93 million yuan, an increase of 121.81% year-on-year. The adjusted EBITDA of 1-3Q23 was 725 million yuan, down 8.24% year on year, mainly due to ① the sale of “Tianhong Weioh” shares in the same period last year, confirming investment income of 250 million yuan; ② supporting rent reduction of 123 million yuan for merchants in the same period last year.

4. Business review: (1) Online business continues to develop steadily, and continue to explore public domain platforms. ① In 3Q23, online sales increased 1.6% year over year; supermarkets accounted for 22.3% of in-home sales, with third-party platforms contributing nearly 20%. ② 3Q23 had 351 million impressions on Douyin, an increase of 116% year on year. Ticket sales achieved GMV of 110 million yuan, an increase of 405% year on year; GMV of 259 million yuan on Meituan ticketing.

(2) Deeply polish the high-quality supply chain and build a strategic core product group. ① Sales of the strategic core product group increased 2% year over year. ② Sales of large single products increased 40% year over year; sales of private brands increased 11% year over year. Among them, sales in the snack food category increased by more than 44% in the 45 days before the Mid-Autumn Festival; 3R further promoted the integration of the national supply chain, built a fireworks street, and collaborated with well-known restaurants to develop pre-prepared dishes from their own Mid-Autumn Festival brands, etc.; sales increased 13% year over year; and international direct procurement sales increased 13% year over year.

Maintain judgment on the company. We believe that incentives at all levels of the company are fully covered; build core competitiveness around digitalization, experiential, and supply chains; lead industry innovation. Digitalization already has integrated output capabilities; rich reserve stores, speed up store opening, and innovate management and output models. Through online development and business format upgrading, the company has integrated online and offline, retail and service, and transformed into an integrated online and offline localized consumer service platform.

Update profit forecasts and valuations. The company expects revenue of 12.2 billion yuan, 13 billion yuan and 13.7 billion yuan in 2023-2025, up 0.7%, 6.7%, and 5.3% year on year; net profit to mother of 242 million yuan, 281 million yuan, 320 million yuan, EPS 0.21 yuan, 0.24 yuan, and 0.27 yuan, respectively, up 101.5%, 16.2%, and 13.7% year on year.

We consider that the company, as a retail leader, is one of the few retail enterprises that have achieved business format adjustment and transformation through endogenous innovation. It has the ability and opportunity to promote industry integration. It will be given 0.6-0.7 times PS in 2024, corresponding to a reasonable market value range of 78-9.1 billion yuan, and a corresponding reasonable value range of 6.68-7.80 yuan, maintaining a “superior to the market” rating.

Risk warning: epitaxial expansion falls short of expectations; new store development period lengthens; competition increases risk.