In 2023, same-store sales grew steadily under a high base, with adjusted net profit correction. Subsequent growth can be expected to achieve revenue of 3,051 million/yoy +51%, store-level operating profit margin of 13.8% /yoy+3.7pct, net profit to mother - $27 million, adjusted net profit of 8.778 million, year-on-year loss, adjusted EBITDA of 302 million/yoy +118%. 2H23 revenue of 1,674 million/year on year +50.6%, adjusted net profit of $26 million, corresponding profit margin of 1.6%. The company has maintained steady growth and rapid expansion in same-store sales, and has strong operating performance in new markets. The rise in brand potential is expected to continue to leverage demand in new cities. As the single-store model is optimized and scale effects accumulate, medium- to long-term profitability is expected to increase. We expect an adjusted EPS of 0.3/0.91/2.03 yuan in 24-26. Referring to Bloomberg's 24-year average forecast of 2.8X PS, considering that the company increased the speed of opening stores in 24-26, the current stage requires large personnel reserves, and short-term profitability stability is challenging, so discounts are offered. Based on 2X 24-year PS, the target price is 68.4 Hong Kong dollars, maintaining a “buy” rating.

Strong performance in the new market and improved store profitability

Operating trends in new markets are rising rapidly, becoming the main driver of revenue growth. The revenue of the new market increased 102.9% year on year to 1,506 million yuan, accounting for 49% of revenue, corresponding to the average daily sales of a single store of 12,300 yuan/yoy +36.4%; the revenue of the Kitakami market increased 20.8% year on year to 1,545 million yuan, accounting for 51% of revenue, corresponding to daily sales of 12,900 yuan/yoy -5.1% of the single store. In 2023, the company achieved an 8.9% year-on-year increase in same-store sales, and 1H23/2H23 were +8.8%/+9.0%, respectively. Optimizing operational efficiency boosts profitability.

The profit margin of stores in '23 was 13.8% /yoy+3.7pct, 1H23/2H23 was 13.5/13.9% respectively, the company's adjusted EBITDA rate was 9.9% /yoy+3pct, and 1H23/2H23 was 9.2/10.4% respectively, which continued to improve from month to month. Store labor costs account for 26.9%, yoy-1.7pct, showing economies of scale.

The supply chain is improved, the penetration of new markets is accelerated, and expansion is expected to accelerate

By the end of '23, the number of the company's stores reached 768, with a net increase of 180 stores for the whole year, including a net increase of 39/141 in the North Market/New Market, and the number of stores in the new market increased to 54%. Thirteen new cities have been established, covering 29 cities, speeding up the pace of nationwide penetration. The company plans to open 240 stores in 2024, corresponding to a capital expenditure of 370 million. From the beginning of '24 to March 22, 55 new stores have been opened, 35 are under construction, and 88 have been contracted or approved, accounting for more than 74% of the total number of target stores for the year. It is also planned to open a new Central Kitchen in Wuhan in 4Q24 to help speed up exhibition stores. The plan is to open 300-350 new stores in 25/26 (previous target: net opening of 300 stores every year in 25/26). At the end of the period, the number of members reached 14.6 million, and the share of revenue contributed increased by 4.7 pcts, to 57% CAGR in 2019-2023.

Target price of HK$68.4, maintaining “Buy” rating

We expect 24-26 revenue of 40.39/51.81/6.594 billion yuan, adjusted EPS of 0.3/0.91/2.03 yuan. Referring to the 24-year comparable company Bloomberg, an average of 2.8X PS is expected. Considering that the company increased its speed of opening stores in 24-26 years, the current stage requires large personnel reserves, and short-term profitability stability is challenging. The price is discounted, based on 2X 24-year PS, target price 68.4 HKD, and a “buy” rating.

Risk warning: competition intensifies; store expansion dilutes same-store revenue; store volume price estimation and actual risk of deviation.