Incident: The company announced a positive profit forecast for 2023. The company expects revenue to be no less than 3 billion yuan (yoy +48.5%), net loss to mother no more than 29 million yuan (-223 million yuan in the same period last year), and adjusted net profit of not less than 8 million yuan (-114 million yuan for the same period last year).

2023H2 adjusted net profit turned positive, exceeding market expectations. 2023H2's revenue was not less than 1.62 billion yuan (yoy +46%), net loss to mother was not higher than 37.8 million yuan (-127 million yuan in the same period last year), adjusted net profit was not less than 25.4 million yuan (-44.9 million yuan in the same period last year), and an adjusted net interest rate of 1.6%, compared to 2023H1+2.8pct. The company's revenue was in line with expectations, and adjusted net profit was drastically reduced and corrected (the previous forecast was revised in 2024), and the performance exceeded market expectations. The main factors are: 1) the expansion of the store network, with the number of stores reaching 768 by the end of 2023 (net increase of 180 for the whole year); 2) good sales performance in existing stores and new growth markets; 3) the operating efficiency of stores and companies has improved, and profitability has improved. We expect the operating profit margin of stores in the new growth market to gradually move closer to the mature market in the north (18.3% operating profit margin of the Kitakami market in 2022), and the increase in revenue scale led to a decrease in the rigid cost ratio of the headquarters.

The industry is growing rapidly, gaining momentum in a period of high potential development, and there is much to be done. According to Frost & Sullivan, the Chinese pizza market is expected to reach 77.1 billion yuan in 2027 (CAGR of 15.5% in 2027), and industry chain, convenience, and localization are on the rise. The company is developing at a high level of brand potential, achieving rapid growth through excellent management with strategic decision-making, delicious products, and highly standardized operation services. Overall, the same store has continued to grow positively since Q3 of 2017. The actual closing rate for 2020-2022 was less than 1%. Domino's top 10 global store sales for the first month created a trend. Since December 23, 2023, 10 stores have opened simultaneously in 8 cities. The Xi'an & Changsha stores sold more than 300,000 yuan on the first day (the company's average annual sales of a single store in 2023 was 3.91 million yuan), and the cost-effective leader in segmented racetracks has thrived.

Profit forecast and investment rating: The company continues to expand its business layout. It plans to add 180/240/300 stores respectively in 2023-25, and reach 1,308 stores by the end of 2025. Along with the increase in profitability due to the revenue scale effect, we adjusted the company's net profit to -0.3/0.4/150 million yuan in 2023-2025 (previous value was -0.8/0.4/150 million yuan). The current market value corresponds to a 3-year dynamic PS of 2.4/1.8/1.4 times. The company's single-store model is high quality, and the same store continues to grow. In the future, stores will further expand into new growth markets, and the penetration rate is expected to increase rapidly. We are optimistic about the company's medium- to long-term performance and good growth, and maintain a “buy” rating.

Risk warning: Liquidity is under pressure due to adjustments in the Hong Kong Stock Connect, food brands are iterating too fast, food safety, and industry competition is intensifying.