2023 results are in line with market expectations

The company announced its 2023 results: revenue of 2.74 billion yuan, +17.1% year over year; net profit to mother of 116 million yuan, +357% year over year. Excluding dividend withholding tax, net profit affected about 145 million yuan; 2H23 revenue +14.3%, which doubled net profit, in line with market expectations. The annual dividend rate reached 93.5%, exceeding market expectations.

Development trends

Weak demand in 4Q23 dragged down full-year performance, and the new two-in-one business format of chilled fresh hot and halide is expected to boost consumer demand.

2H23 added 178 new stores and closed 68 stores due to weak demand, etc. Overall, the number of new stores opened throughout the year was concentrated in transportation hubs, with a net increase of 121. Against the backdrop of weak overall consumption of halogen products, the company is actively seeking transformation. On the one hand, it continues to optimize the product structure and launch new products with a low unit price, such as 9.9 yuan of sweet and spicy chicken wings, which account for 17% of monthly sales in 23 years, leading to a year-on-year ratio of +20% in total customer orders; on the other hand, the company launched chilled and hot halide 2-in-1 stores to increase the thermal halogen business within traditional stores and enhance product richness and appeal to young consumers. Currently, a total of 2 2-in-1 stores are being piloted. The initial efficiency improvement effect is obvious. Multiple, average customer order At 22 yuan, the performance was better than locking in freshness. In the future, the company will stick to Zhou Heiya's characteristic taste, enrich the price matrix and product form, and boost consumer demand.

Profit margins are expected to increase in 24, and the cost side is favorable. In 4Q23, due to weak consumption and the diversion of businesses such as ready-to-drink and snack stores, the company's same-store performance was slightly pressured, leading to a loss in the 4Q single quarter. The gross margin for 23 years was well controlled against the backdrop of a sharp rise in costs. At the same time, the SG&A fee ratio was also reduced by 5.6 ppt. Looking ahead to 24, we expect 1H24's gross margin to improve significantly as duck and sideline prices fall significantly. 1Q24 will achieve positive profits while the demand side is still weak. Throughout the year, we expect the company to continue to improve supply chain efficiency and maintain a steady increase in profitability.

The primary goal for 24 years was to improve the quality of store operations. In line with the current consumption trend in the halogen products industry, the company may no longer pursue a significant increase in the number of stores opened in 24, but will focus on the continuous improvement of the quality of store operations. Since the beginning of the year, the company's stores have declined slightly due to the pre-holiday blizzard in Wuhan, etc., but during the Spring Festival compared to the same period last year, GMV was +12.7%, indicating that the company's demand base is still solid. Judging from the store layout, we believe that transportation hub stores are expected to remain stable, while business districts and community stores are more affected by demand. Some franchisees' return cycle may be extended to more than 24 months. The company will continue to support franchisees through sales incentives, franchise fee relief, etc., to enhance the enthusiasm of franchisees to open stores.

Profit forecasting and valuation

The company traded 16.2/13.6 times the 2024/25 price-earnings ratio. Considering weak demand, the 2024 profit forecast was lowered by 48.3% to $227 million. At the same time, we introduced a profit forecast of $257 million for 2025; the target price was lowered by 50% to HK$2, corresponding 18.7/15.7 times the 2024/25 price-earnings ratio and 15.6% upward space. Maintain outperforming industry ratings.

risks

Demand is weak; competition intensifies; new products fall short of expectations.