Incident: Nayue's Tea announces 2023 full year results. In 2023, the company's revenue was 5.16 billion yuan, up 20.3% year on year; gross profit margin was 67.1%, up 0.1 pct year on year. The adjusted net profit for the year was 20.91 million yuan, and the adjusted net interest rate was 0.4%, turning a loss into a profit.

Comment: Opening stores made up for the decline in single stores, and high-tier cities continued to be encrypted. In 2023, Nai Xue's direct tea store revenue was 4.69 billion yuan, an increase of 18.2% over the previous year. ① Single store: Daily sales were about 10,000 yuan, down 14.7% year on year, of which the customer unit price was 29.6 yuan, down 13.7% year on year; the average daily order volume was 344 orders, down 1.1% year on year. ② Stores: At the end of 2023, Naishue operated 1,574 direct-run stores in 111 cities, with a net increase of 506 for the whole year, an increase of 47.4% over the previous year. There were 1230/344 Class I and Class II stores each, an increase of 334/172 compared to the previous year. There were 542/552/328/152 stores in first-tier, new-first-tier, second-tier, and other cities each, an increase of 169/195/86/56 over the previous year. The company expects to add about 200 stores directly managed by Naixue's tea in high-tier cities in 2024. ③ Same store: The average daily sales of the same store in the TOP6 cities is about 13,000 yuan, which is higher than the daily sales of a single store of 10,000 yuan. As store operations mature, there is still room for growth in daily store sales. ④ Members: By the end of 2023, the number of registered members reached 80.5 million, an increase of 42.2% over the previous year. The number of monthly active members was 4.7 million, and the monthly repurchase rate was 23.9%.

RTD's business is growing rapidly, and the franchise business continues to advance. ① RTD bottled beverages: Revenue in 2023 was 270 million yuan, up 70.0% year on year, the revenue share increased by 1.5pct to 5.2%, and the loss in 2023 was about 40 million yuan. The company expects the loss margin to narrow sharply in 2024. ② Join:

The franchise business was opened in July 2023, and by the end of 2023, there were 81 Nayuki tea franchise stores. A new franchise policy was announced in February 2024, and the investment cost of a single store was reduced to 580,000 yuan. As of the end of February 2024, Naixue's tea franchise stores exceeded 200. The company expects to open hundreds of new franchisees in 2024, maintaining the target of opening 2000-3000 franchise stores in 2-3 years. ③ Going overseas: At the end of 2023, the first store of Tea in Bangkok, Thailand was opened, with sales exceeding 1 million yuan in the first month. It is expected that in 2024, it will open low-double-digit direct stores in Southeast Asian markets such as Singapore, the United Kingdom, and the United States.

The cost structure has been continuously optimized to turn losses into profits throughout the year. ① Gross profit margin: The gross profit margin in 2023 was 67.1%, up 0.1 pct year-on-year. ② Manpower: The employee cost rate was 27.2%, a year-on-year decrease of 4.6pct. Among them, Nai Xue's tea direct-run store employee expenses ratio was 20.3%, a decrease of 3.2 pcts year on year. ③ Rent: The rent rate was 13.9%, down 1.6 pct year on year. Among them, Nai Xue's direct tea store rent cost ratio was 14.5%, down 1.0 pct year on year. ④ Takeout: In 2023, Nai Xue's tea direct store accounted for 41.9% of takeout revenue, down 4.4 pct year on year, delivery fee rate decreased 1.3 pct year on year to 7.6% year on year, and Nai Xue's takeout fee rate of tea store was 8.2%, down 0.8 pct year on year. ⑤ Profit margin: The operating profit of Nai Xue's direct-run tea store was 830 million yuan, up 76.3% year on year. OPM at the store level was 17.7%, up 5.9 pct year on year, mainly due to a decrease in manpower, rent, and takeout expenses. The company will strive to achieve the 20% OPM target for stores in the future. The company's adjusted net profit was 20.91 million yuan, and the adjusted net interest rate was 0.4%, achieving profit for the whole year.

Valuation forecast: Considering the company's business adjustments, more store expansion will be based on asset-light operations in the future. We lowered our 24-25 revenue by 13%/15% each to 73.8/9.25 billion yuan each, and introduced 26-year revenue of 10.94 billion yuan, an increase of 42.9%/25.4%/18.3%, respectively. The adjusted net profit for 24-25 was reduced by 37%/37% each to $27/50 million yuan, and the adjusted net profit for '26 was introduced, with adjusted net profit of 3.6%/5.4%/6.2%, respectively. We maintained the company's 24-year PE valuation of 25 times, corresponding to a target market value of HK$7.4 billion, and lowered the target price by 39% to HK$4.3 (corresponding exchange rate HKD/CNY = 0.9; the previous target price was HK$7.0), maintaining an superior market rating.

Risk: The main risk of our ratings and target prices is that the economic downturn suppresses consumption, industry competition intensifies, and store expansion and sub-brand development fall short of expectations.