Incident: The company released a performance forecast. In 2023, it is expected to achieve net profit of 120-160 million yuan, an increase of 122.01%-196.02% over the previous year; it is expected to achieve net profit without deduction of 0.85 to 125 million yuan, an increase of 500.02%-782.38% year-on-year.

There was a net loss in the fourth quarter, with a year-on-year decrease. Q4 net profit for a single quarter is expected to be -0.88 billion yuan to -0.48 billion yuan, a year-on-year loss of -133 million yuan, a year-on-year decrease of 0.4-85 billion yuan; Q4 net profit deducted from non-return to mother of -1.06 billion yuan to -066 million yuan in a single quarter; and -144 million yuan for the same period in 2022, a year-on-year loss of 37.077 million yuan.

In 2023, the company actively optimized the original business format stores, closed inefficient stores, enhanced overall profitability, and actively developed new snack stores and discount stores, forming a stronger multi-format linkage advantage within the region. We determine that the net loss for the fourth quarter may be related to drainage activities such as closing expenses for inefficient stores, upfront investment costs for new business formats, and promotions.

The 2023 performance assessment did not meet the standards, and 2024 is still profitable. The equity incentive assessment target announced by the company in June 2023 is net profit of not less than 220 million yuan or operating income of not less than 18.2 billion yuan and net profit of not less than 200 million yuan. The 2023 performance assessment did not meet the standards. The company's 2024 performance assessment target is net profit of not less than 300 million yuan or operating income of not less than 19.3 billion yuan and net profit of not less than 250 million yuan. According to the 2023 performance forecast center, if the 2024 net profit target of 300 million yuan is achieved, the company's net profit growth rate will not be less than 114.29%. Considering the acceleration in the number of net stores opened by the company in 2023Q3, it is speculated that the adjustment of inefficient stores may be coming to an end, and the impact associated with closing stores in 2024 is expected to weaken. Combined with the accelerated layout of the new business format, profits may be highly flexible.

Release a repurchase plan to demonstrate confidence in development. The company plans to use no more than 150 million yuan of its own capital to repurchase the company's shares through centralized bidding transactions. The number of shares repurchased is 8-16 million shares (1.24%-2.47% of the company's total share capital), and the repurchase price will not exceed (inclusive) 11.00 yuan/share. The repurchased shares will be used for equity incentives or employee shareholding plans, which is conducive to unifying the interests of the company, employees and shareholders, fully mobilizing the enthusiasm of the core team, improving employee cohesion and competitiveness, enhancing market confidence, and promoting the company's sustainable and healthy development.

Investment advice: The company is a leader in regional economies and has established strong channels and supply chain barriers in the Yanwei region, the core market. In the medium to long term, there is still plenty of room for improvement in the market share of Shandong Province compared to the Yanwei region. The loss situation of stores outside the province has improved, the ability to expand offsite has gradually become prominent, and the medium- to long-term growth path is clear. This year, the company entered a booming snack market, which is expected to open up room for further growth. We expect the company's net profit to be 1.45/3.07/380 million yuan in 2023-2025, corresponding to PE40.2/19.0/15.3X, maintaining an “increase in holdings” rating.

Risk warning: The risk that macroeconomic recovery falls short of expectations, expansion outside the province falls short of expectations, market competition intensifies, and new business formats fall short of expectations.