Despite steady recovery and active store opening in 23 years, the company disclosed full-year results for 2023 due to weak consumption, achieving revenue of 5.164 billion yuan (+20.3% year over year) and net profit of 0.13 billion yuan (year-on-year loss), all of which were weaker than our expectations. The offline consumption scenario has been repaired since 23. The company has accumulated a net increase of 506 direct-run stores, but overall consumption power is weak, and customer unit prices and order volume have weakened.
The company continues to pay attention to the quality of operations, optimizing rent and labor costs, driving profits and reversing losses. In the future, the company may still have room for optimization on the cost side. We forecast net profit of $0.49, 1.83, and $326 million for 24-26 years. Based on the DCF valuation method (assuming a WACC of 11.6% and a sustainable growth rate of 1.8%), we adjusted the target price to HK$4.29 (previous value: HK$7.16) to maintain a “buy” rating.
Customer unit price and order volume have decreased compared to '22
In 2023, there was a clear trend of stratification in the domestic consumer market. Consumer spending was more cautious. The company attracted consumers in a more competitive product price range. Affected by this, the customer unit price of Nai Xue Tea Drink dropped (from 34.3 to 29.6 yuan), and the company added many new stores (net increase of 506 direct-run stores and 81 franchisees). The company's order volume still declined slightly year-on-year in '23 (daily orders dropped from 348.2 orders to 344.3 orders).
The single-store model has been greatly optimized
Although customer unit prices have declined, the operating profit margin of the company's stores increased to 17.7% (+5.9pct year on year), and the cost optimization effect was obvious. The store model showed significant improvements in the company's labor cost management and rent. Among them, labor costs and rent-related depreciation of usage assets accounted for -4.5 pct and -2.1 pct of store revenue, respectively, all of which met the company's goals of stabilizing labor cost rates and optimizing actual rental costs. Moreover, the company still plans to achieve the store's operating profit margin target of 20% or more.
Brand strength drives diversified business growth
Benefiting from increased brand strength, the company continued to increase investment in bottled beverages and open up franchise business in 2023. The company's bottled beverage revenue reached 267 million yuan (+69.8% year over year), and other revenue including franchise business revenue reached 152 million yuan (+84.4% year over year), and the company plans to add hundreds of new franchisees in 24 years, optimize franchise policies, or effectively drive related service revenue.
The 200 direct-run store exhibition plan. Offline retail needs to be repaired. The company plans to open 200 new direct-run stores in 24, and under the current store model, we believe that the company still has room for optimization on some cost sides. In the current consumption environment, let's wait for consumption restoration to drive the optimization of the company's operating leverage.
Risk warning: China's macroeconomic recovery fell short of expectations, market competition in the high-end ready-made tea industry intensified, and store expansion fell short of expectations.