Incident: Tianhong Co., Ltd. released its 2023 annual report.

Overall revenue for 2023 was $12.086 billion, a year-on-year decrease of 0.32%. On a quarterly basis, the company's 2023Q1/Q2/Q3/Q4 revenue was 3.384 billion/ 2,847 billion/ 3.02 billion yuan/2,835 billion yuan, a year-on-year change of -2.23%/+2.81%/+0.96%/-2.34%. In 2023, the company's shopping centers and department stores seized opportunities for consumer recovery, strengthened business format upgrades and actively adapted to changes in new consumer demand. Passenger traffic and sales continued to increase quarter by quarter, and the total revenue and profit of comparable stores increased both.

① Continuous optimization and adjustment of the company's stores. By the end of 2023, the company had 41 shopping centers (+1), 59 department stores (-3), and 116 supermarkets (-3).

② The overall growth trend of shopping centers is good. Self-operated stores have revenue of 2,034 billion yuan/ +17.46%, department store revenue of 2,260 billion yuan/ +2.77%, and supermarket revenue of 7.622 billion yuan/ -4.04%.

Store marketing and transformation and upgrading: The company set up a marketing center to coordinate national marketing, enhance the influence of the Tianhong brand, and achieve a marketing volume and sales explosion. The company's sales performance increased significantly, with a year-on-year increase of 9%. On the shopping center side, we are upgrading the big store experience and promoting first-store breakthroughs and the introduction of high-end products; in terms of the department store business, we continue to promote the transformation of department stores into community living centers; in terms of supermarkets, we continue to strengthen the construction of strategic core product groups, and the effect of large single products is prominent.

Online and membership: Online business continues to develop steadily, with online product sales and digital service revenue GMV of 5.44 billion yuan. The company's overall number of digital members exceeds 47 million, and there are more than 4 million monthly active app and applet members. Member sales increased 10% year-on-year, and the number of consumer members increased 8.2% year-on-year, and achieved growth for 5 consecutive years.

Gross profit margin: The company continued to optimize the cost structure, evaluate the commercial value of existing stores, and continue to promote special work to reduce losses and reverse losses. The gross margin increased across the four quarters. The gross profit margin in 2023 was 38.26%, up 1.46pcts year on year; of these, the 2023Q1/Q2/Q3/Q4 gross margin was 37.06%/38.99%/36.56%/40.78%, up 0.07/3.34/0.31/2.51 pcts year on year.

Expenses: Financial expense rates declined significantly in 2023. The company's sales/management/R&D/finance expenses rate in 2023 was 32.12%/3.14%/0.68%/1.10%, respectively, with a year-on-year change of +0.22/+0.12/-0.07/-1.00pcts.

Net profit and dividends: The company plans to pay a higher percentage of dividends. Net profit to the mother in 2023 was 227 million yuan, up 88.75% year on year, and the net profit margin was 1.88%, up 0.89pcts year on year; the company plans to pay 0.16 yuan of dividends per share, with a dividend payment rate of 82.5%.

Cash flow: The company's operating cash flow remains steady. The net cash flow from the company's operating activities in 2023 was 2,746 billion yuan, compared with 2,404 billion yuan in the same period last year; net cash flow from investment activities was -678 million yuan, compared to -124 million yuan in the same period last year.

Profit forecasting and valuation: The company has leading retail digital technology application and operation capabilities in the country. An integrated online and offline business model has taken shape. In the future, it is expected that department stores, supermarkets, and shopping malls will use omni-channel offline value creation. It is also expected to serve consumers by integrating online resources, serve B-side customers with consumer service solutions, and use digital technology to empower retail ecosystem partners to achieve comprehensive development. The comprehensive estimated net profit for 2024-2025 is 22/326 million yuan, corresponding to the current 22x/18xPE, giving it a “recommended” rating.

Risk warning: Economic recovery falls short of expectations, store adjustments fall short of expectations, digital business falls short of expectations