Incident: On April 1, the company released its 2023 annual report, achieving full year operating income of 10.133 billion yuan/year on year, net profit of 561 million yuan/year on year +15.53%, net profit of 490 million yuan/year on year +9.26%; revenue of 2,491 million yuan/year on year +1.83% in a single quarter, net profit of 154 million yuan/year on year +20.3%, net profit of non-return mother 103 million yuan/year on year -8.19%.

The number of stores is growing steadily, and there is still integration and transformation, and revenue has increased slightly. In 2023, the company exhibited 144 stores and closed 66 stores. By the end of the year, a total of 3,639 stores had increased, number of store closures decreased, and 279 stores were renovated and upgraded throughout the year. Annual revenue of 10.133 billion yuan was achieved, +1.12% year over year. The same store is expected to remain slightly negative, mainly due to the 2022 base figure.

Q4 Gross margin increased year-on-year, and the cost side was generally stable. 1) In 2023, the company's gross margin was about 29.63% /year on year +0.57pct, of which Q4 gross margin was about 30.43%/2.13pct year on year, high year-on-year increase; 2) The cost side was basically stable. The sales expense ratio, management fee rate, and financial expense ratio in 2023 were 22.8%/1.5%/0.6%, respectively.

The investment income of Xinwang Bank is relatively stable, and the performance is basically in line with expectations. 2023Q4, the company's Xinwang Bank and Gansu Hongqi achieved investment income of 40.3719 million yuan, which was stable month-on-month, and achieved annual investment income of 147 million yuan (97 million yuan in the same period last year). Overall, the company achieved net profit of 561 million yuan and net profit of 490 million yuan after deducting non-return to mother for the whole year, which is basically in line with expectations.

Investment advice: As a leader in scarce large-scale profitable convenience stores in China, the company has growth potential in multiple dimensions in terms of exhibition stores, daily sales, and gross margin; in 2023, the company's revenue/net profit is still relatively stable. Due to Xinwang Bank's profit performance in 2023, we raised the corresponding assumption. We expect the company's operating income in 2024-2026 to be 105.38/109.59/11.398 billion yuan, net profit to mother of 588/5.97/632 million yuan, and EPS of 0.43/0.44/0.46 yuan/share respectively. The current stock price corresponds to 11.4x/11.2x/10.6xPE, respectively, to maintain the “buy” rating.

Risk warning: The impact of online diversion far exceeds expectations; labor and rent costs have increased dramatically; industry competition has intensified markedly.