Event: On January 27, the company released its 2023 performance forecast. In 2023, the company achieved net profit of 65-75 million yuan, a year-on-year increase of 110.93%-143.38%; realized net profit without deduction of 4300-53 million yuan, an increase of 912.77%-1148.29%; and basic earnings per share were 0.11-0.13 yuan/share.

Single store revenue improved, and 72% of the store expansion plan was completed in the first three quarters of 2023. 2023H1 single-store sales were 650,000 yuan, an increase of 58,400 yuan over 2022 single-store sales, and basically returned to 90% of single-store sales before the pandemic (2019). Affected by the epidemic, the number of stores continued to decline in 2021 and 2022. In 2023, with the gradual improvement of the macroeconomic situation, the company adhered to the “Thousand Cities, Ten Thousand Stores” five-year strategy. By the end of June 2023, the number of company stores had reached 4,213, including 255 direct-run stores and 3,958 franchise stores. The performance assessment requirements for the equity incentive plan are that 2023/2024f/2025 revenue will increase by 5%/20%/40% compared to 2022, respectively, and the number of new stores opened will increase by 2,000 each year. In the first three quarters of 2023, 1004 stores were actually expanded, and 72% of the store expansion plan was completed. It is expected that store expansion and single store improvement will continue to advance in 2024.

Cost-side pressure decreased, and comprehensive gross margin increased by 2 pct. Due to the shortage of personnel in the raw materials supply market in the north after the Spring Festival, the market prices of the company's main raw materials, duck wings, duck neck and other related duck by-product ingredients all rose sharply. Among them, duck paws rose as high as 37.60 yuan/kg, duck wings rose to 19.80 yuan/kg, and duck neck to 27.80 yuan/kg. The price of 2023Q2 raw materials declined. Among them, the unit price of duck paw fell to 25 yuan/kg, and the unit price of duck neck dropped to 10 yuan/kg. The gradual decline in production costs led to a steady rise in comprehensive gross margin. The comprehensive gross margin of 2023Q3 increased by 3.87 pct. The company expects the comprehensive gross margin for the full year of 2023 to increase by more than 2 pcts year on year.

Major shareholders' fixed increases helped expand production capacity, demonstrating the company's confidence in long-term development. The company issued the “Prospectus on Issuance of Shares to Specific Targets” in September 2023. The target is Xinyuhuang Shanghuang Investment Management Center (limited partnership). Its controlling shareholder is Huangshanghuang Group, which raised no more than 450 million yuan in capital, mainly for Fengcheng Huangda Food Co., Ltd. meat and duck slaughter and high-value utilization processing and processing construction project (Phase I), Zhejiang Huangshanghuang Food Co., Ltd. and the food processing and cold chain storage center construction project of Hainan Shanghuang Food Co., Ltd. with an annual output of 8,000 tons. This fund-raising project will help the company to further expand its business scale and improve its market layout. It is also in line with the company's “531” long-term and medium-term plan.

Investment advice: The company has been deeply involved in the industry for many years as the “first stock of braised food”. Under the turmoil of the epidemic, it still adheres to the five-year “thousands of stores in a thousand cities” strategy. It is constrained by weak macroeconomic recovery. The pace of store expansion in 2023 fell short of expectations, but the overall recovery situation continued to improve. The company optimizes stores in a timely manner, deepens “two sales and one advantage” + “Douyin, Kuaishou” around the 1+N model, and promotes the improvement of single store performance. Under the “531” long-term medium-term plan, the company is expected to achieve revenue of 19.05/23.66/2,793 billion yuan in 2023-2025, up -2%/24%/18% year on year; achieve net profit of 0.74/1.16/ 172 million yuan, up 140%/57%/49% year on year, respectively; and maintain a “buy” rating of 70/45/30X, respectively.

Risk warning: food safety risk, industry competition risk, raw material price fluctuation risk, risk of store expansion falling short of expectations, macroeconomic downturn risk.