Core views

The company reversed its performance losses in 2023, and the early cost reduction and efficiency measures gradually showed results. In 2023, there was a net increase of 506 direct-run stores, and 81 franchised stores at the end of the year. There was a significant increase in store operating profit margins in all tier cities and individual stores as a whole. The overall store operating profit margin was 17.7%, +5.8pct compared to the previous year. The company's balance and liability situation is stable and improving. It is expected that 2024 will focus on expanding franchise stores and expanding overseas stores. It is expected that hundreds of new franchisees will be added, and overseas stores will be added in low double digits. Combined, active optimization of the store cost structure is expected to drive new growth.

occurrences

The company announced its 2023 results. In 2023, it achieved revenue of 5.164 billion yuan, +20.3% year-on-year, and realized net profit of 13.2.24 million yuan to mother, compared to -469 million yuan in the same period in 2022.

Brief review

Successfully reversed losses, and cost reduction and fee control measures gradually paid off

Looking at the company's revenue structure in 2023, Nai Xue's direct tea store had revenue of 4.692 billion yuan, +18.2% year-on-year, accounting for more than 90%. The bottled beverage business had revenue of 267 million yuan, +69.8% year over year, growing rapidly, accounting for 5.2%. Deck revenue has shrunk further. Other revenue was $152 million, +84.4% over the same period. This portion includes revenue from Nai Xue's direct tea stores, Taigai tea shops, and business lines other than bottled beverages. It mainly includes sales of souvenirs and retail products such as tea gift boxes and limited holiday gift boxes, as well as revenue from the franchise business. It is expected that the future will continue to grow rapidly with the rapid development of the franchise business. Looking at direct store order sources, the share of takeout orders fell to 41.9% in 2023, -4.4pct year on year.

At the end of 2023, the number of registered members of the company exceeded 80 million, and the monthly repurchase rate was about 23.9%.

By the end of 2023, Nai Xue's tea direct-run stores reached 1,574, a net increase of 506, and the opening of stores has accelerated markedly. The company launched a franchise model in 2023. By the end of 2023, there were 81 Nai Xue's tea franchise stores, and by the end of February 2024, about 200 franchise stores had opened. In terms of store types, there was an increase in the number of second-class stores, accounting for 21.9% of direct sales, +5.8pct; the operating efficiency side company also achieved good restoration. In 2023, the operating profit margins of Nai Xue's first-tier, first-tier, second-tier stores in first-tier, second-tier, and other cities were 19.6%, respectively, +6.1pct, +5.1pct, and +3.0pct. The year-on-year increase was significant, and the operating margin of the store gradually approached the expected level of about 20%. Among the same stores in major cities, the operating profit margin of the same store in Shenzhen reached 23.4%, +5.7pct. Xi'an Da 25.0%, +6.6pct. Shanghai 14.0%, +10.4pct. The operating profit margin of Class II PRO stores was 20.4%. From the perspective of the direct-run single-store model, manpower, rent, and takeout costs accounted for 20.3%, 14.5%, and 8.2%, respectively. The year-on-year tea machine, -1.0pct, and -1.2pct were effective. The results of early tea making machines and digital scheduling were good, and the overall store operating profit margin was 17.7%, +5.8pct year-on-year. Capital expenditure in 2023 was $541 million, +20.8% YoY. The balance and liability situation is stable and improving. As of the end of 2023, the company held a total of 2,984 billion yuan in cash and deposits. The overall level was relatively stable under continuous cash opening. There were no interest-bearing loans, and there are currently no large-scale refinancing plans. Net cash flow from operating activities in 2023 was $829 million, up about 170% year over year. From January to January 2024, the company repurchased a total of 3.51 million shares of the company.

The franchise is expected to fully unleash its potential. The company, which continues to build tea brand recognition, expects to add about 200 new direct-run stores in 2024, and the core focus may be on the franchise business. It is still expected that the number of franchise stores will reach 2,000 to 3,000 within 2-3 years. The speed of franchise opening can also be seen to accelerate markedly in early 2024. Franchise stores have achieved good development results. Franchise stores mainly focus on middle- and low-tier cities, which will help the company explore new markets. Furthermore, the company opened its first store in Thailand at the end of 2023, and will continue to increase overseas market expansion efforts thereafter. It is expected that joining and overseas business will become an important driving force for the company's future development, and are also in line with current tea industry trends. The company updated its franchise policy in February 2024. The investment budget was reduced by nearly half to 580,000 yuan, and the area requirement was lowered from 90 square meters to 40 square meters. Up to now, the company expects to open hundreds of new stores in 2024; on the overseas business side, the company plans to open stores in Hong Kong, Macau, China, etc., as well as in Southeast Asia, the United Kingdom, the United States and other countries. The initial focus is on direct management. The target for 2024 is to open new low double digit stores overseas. It is expected that the company's fee reduction and headquarters fee dilution combined with the iteration of the new model will have strong potential for growth.

Investment advice: The company is expected to achieve net profit of 166 million yuan and 353 million yuan from 2024 to 2025. The current stock prices correspond to PE at 28X and 13X respectively, maintaining an “increase in holdings” rating.