2023 adjusted net profit to mother increased 10% year over year

The company announced full-year results for 2023: The company's revenue was 82.4 billion yuan, which was basically the same as the year on year, mainly due to the company's active optimization of low gross profit business and the impact of macroeconomic disturbances; adjusted net profit to mother was 450 million yuan, an increase of 10% year-on-year under a comparable scale, corresponding to an adjusted net profit margin of 0.5%.

Development trends

The trading business structure has been optimized, and growth has been relatively slow. In 2023, the revenue from the trading business also increased by 0.5% to 81.6 billion yuan. The company actively optimized the structure of the home building materials and alcohol and beverage sector, as well as agricultural machinery and household appliances, which were affected by the industry cycle; gross margin of the trading business also increased by 0.2ppt to 2.5%. Looking ahead to 2024, the company expects to focus on high-quality growth, with gross profit and net profit as core indicators. The company expects gross margin in various categories to continue to rise, and to do its best to maintain a relatively stable revenue scale on this basis. The company expects to continue to optimize the structure of home building materials and beverages, and the travel and home appliance sectors are expected to be catalyzed by favorable policies.

Optimize the second-tier category structure: Focus on first-tier brands, reduce second-tier and third-tier brands with weak supply chain capabilities, and promote pilot high-margin production and marketing private brands. The gross margins of the transportation, agricultural machinery, household appliances, household building materials, and cleaning industries have all increased.

Increase the share of direct sales in member stores: The share of revenue from low-margin channels continued to decline, and the share of member store revenue increased by 14ppt to 39%. In addition, active member stores also increased 19% to 90,000, and ARPU increased to 350,000 (compared to 260,000 in the same period last year).

Improving upstream supply chain control capabilities: In 2023, the company deepened cooperation with leading brands, including Apple in the consumer electronics sector and Unilever in the washing industry. The share of the headquarters supply chain increased steadily by 2ppt to 51% over the same period last year.

Paid service stores continue to expand, and gross margins are optimized. Service business revenue in 2023 decreased 17.6% year over year to 650 million yuan, of which SaaS+ business revenue also increased 5.3% to 550 million yuan. Under the promotion model, users and renewal rates continued to increase to 36% year over year, but ARPU was under pressure; merchant solutions were scaled down due to strategic adjustments, but AI and digital-driven service efficiency improved, and gross margin increased by 10ppt to 36%. Looking ahead to 2024, we expect service business revenue growth to be driven by pay-store growth, ARPU may be relatively stable, and gross profit is expected to continue to be optimized.

The quality of the Group's operations has improved, and the cost investment is relatively stable. In 2023, the Group's gross profit increased by 0.1 ppt to 3.3%, mainly due to product restructuring and revenue quality improvement; the three expense ratios were relatively stable year-on-year.

Looking ahead to 2024, the company expects to continue to increase its share of high-margin business while strictly controlling fees. We expect the Group's net profit to mother to continue to grow year-on-year.

Profit forecasting and valuation

The company is currently trading at an adjusted price-earnings ratio of 30x/26x in 2024/2025. Considering the company's active pursuit of business structure optimization, we lowered our 2024 revenue and profit forecasts by 22% and 32% to 81.7 billion yuan and 500 million yuan, respectively, and introduced 2025 revenue and adjusted net profit forecasts of 815 million yuan and 570 million yuan. We maintained our outperforming industry rating and lowered our SOTP-based target price by 14.3% to HK$36, corresponding to an adjusted price-earnings ratio of 37/27 times in 2024/2025, with 17.5% upside.

risks

Macro consumption is weak, and competition in the sinking market is intensifying.