Revenue growth in the second half of 2023 declined from the first half of the year, with a net interest rate of 0.4% for the whole year. In 2023, the company's revenue was 5.164 billion yuan/ +20.33%; achieved net profit of 0.13 billion yuan and adjusted net profit of 121 million yuan, which turned a loss into a profit compared to last year's -4.69 million yuan and -461 million yuan; achieved an adjusted net interest rate of 0.4%, which fell short of management's expectations of 5% at the beginning of the year, which is mainly due to the decline in same-store sales in the second half of the year. With 2023H2, the company's revenue was 2,570 billion yuan/ +14.41%, which was basically the same as in the first half of the year; net loss to mother was 53 million yuan, and adjusted net loss was 49 million yuan, a decrease compared to last year's loss of 215 million yuan and 212 million yuan.

In 2023, 544 new stores directly managed by the main brand were opened, and about 200 stores have been opened after optimizing the franchise policy. In 2023, Naxue's main brand opened about 544 new homes, a net increase of 506, which is slightly lower than the 600 stores expected at the beginning of the year.

Demand for stores gradually faded in the second half of 2023. The company adjusted its development strategy and officially launched the franchise model expansion in July. A total of 81 franchise stores were opened by the end of the year. In the early stages, in order to balance brand control and store expansion, the company's franchise policy was stricter than that of its peers; in February 2024, the company made optimization adjustments. Among them, the investment budget was lowered from nearly 1 million yuan to 580,000 yuan, and the area requirement was lowered from 90 square meters to 40 square meters, reducing the financial pressure on franchisees and expanding the scope of properties. The number of franchisees increased to about 200 by the end of February.

Same-store volume and price pressure came under pressure in the second half of 2023, but cost reduction and efficiency are beginning to show results. In 2023, Nai Xue's direct-run store spent 29.6 yuan per order, -13.7%, and the product structure was adjusted to suit the consumption environment; the daily order volume of a single store was 344 orders, -1.1% compared to the same period; 23H1 spent -11.7% per order, and the daily order volume of a single store was +5.0%. It can be seen that the second half of the year was even more dragged down. The profit margin of direct operation in '23 was 17.7%/+5.9pct, and there is still room for improvement from the 20% target. Among them, the labor cost rate was 20.3%, and the actual rent cost rate was 14.5%, which basically met the company's goals of within 20% and 15%, and cost reduction and efficiency were beginning to show results.

Short-term demand is still disrupted. In the future, we will continue to track the pace of direct-run store inventory optimization and declining franchise expansion, taking into account the potential for overseas layout. Currently, the same store's performance is still lackluster. From January to January this year, the average store efficiency of Nayuki's store recovered by about 70% compared to last year. At the end of 2023, there were 1,574 direct-run stores in Naixue, and 200 new stores are expected to open this year. No significant net increase is expected after considering closing. Currently, the core focus is on optimizing the profit margins of existing stores, and we are still committed to 20% + store profit margins in the future. At the same time, the company will increase its investment in franchise business. The goal is to reach hundreds of stores in 2024, and the target is to open 2-3 thousand stores in the next 2-3 years. Subsequent expansion is expected to accelerate along with the optimization of the franchise policy. The company has also begun experimenting with overseas layout. It plans to open stores in places such as Hong Kong, Macau, China, etc., as well as in Southeast Asia, the United Kingdom, and the United States. In the early stages, it is mainly direct management, and liberalization of franchises is not ruled out in the future; the overseas target for 2024 is in the early stages.

Risk warning: Consumption recovery falls short of expectations, expansion falls short of expectations, risk that shareholders will reduce their holdings.

Investment advice: The company itself is at an inflection point in performance. Our previous forecast for 2023-2025 was based on the assumption that single-store daily sales recovered relatively smoothly and the single-store model improved after the domestic epidemic liberalization, but in reality, store sales in the second half of last year were relatively lower than expected. At the same time, the profit margin for the whole year recorded 0.4%, which was also lower than the company's 5% forecast at the beginning of the year. Considering the current tea consumption environment, the pressure on the volume and price of stores is still under pressure, we lowered the company's single-store daily sales assumption; at the same time, considering that the company's main expansion model changed from direct management to franchise. Due to the big difference between the profit model and the contribution of a single store, we adjusted our revenue and profit forecasts. We expect the company's adjusted net profit for 2024-2025 to be $1.0/240/370 million (previously the 2024-2025 forecast was $63/960 million, plus 2026), and the dynamic PE valuation is 37/16/10x. The company's main expansion force gradually changed from direct management to franchise. Among them, the optimization of the direct-run store model is showing initial results and there is still plenty of room for improvement. The advantages of franchisees are sinking and expanding the brand are worth verifying. Continue to observe the steady pace of same-store expansion and franchise expansion in the short term, and maintain the “gain” rating.