Net profit to mother increased 127% in 2023, with steady growth in the first quarter of 2024. The company achieved revenue of 17.763 billion yuan in 2023, -2.31% year on year, net profit of 136 million yuan, +127.04% year on year, after deducting non-net profit of 99 million yuan, +275.56% year over year, mainly benefiting from the company's active cost reduction and efficiency efforts and optimization and adjustment of inefficient stores. Revenue and net profit to mother increased 5.73%/7.10% year on year respectively in the first quarter of 2024, and after deducting non-net profit, increased 1.05% year on year, achieving steady overall performance. In addition, the company plans to distribute 0.19 yuan in cash per share (tax included), and the intended profit will account for 88% of net profit attributable to mother for the year.

Store expansion enhances regional density and scale advantages, and supermarket online business sales account for 5.98%. Looking at the subregion, revenue outside Shandong Province increased 4.49% year on year in 2023, accounting for +1pct of revenue reaching 15.35%.

Looking at the business situation of direct-run stores by region in the first quarter of 2024, revenue in Shandong Province increased 8.63% year on year, outside Shandong Province increased 9.81% year on year, and the nationwide layout was steady. The online home delivery business continues to grow. In 2023, online sales increased by 23.9%, and supermarket online business sales accounted for 5.98%. Looking at growth by business category, the main business revenue of comprehensive supermarkets increased by 10.96% in the first quarter of 2024, which was influenced by the adjustment of some stores from community fresh food supermarkets to comprehensive supermarkets; revenue growth in other business formats, including mass sales of snacks and hard discount supermarkets, reached 46.66%. In terms of store expansion, there was a net increase of 44 in the full year of 2023, and a net increase of 16 in the first quarter of 2024 compared to the end of 2023, including a net increase of 14 snack stores and a net increase of 2 general supermarkets.

Gross margin increased in 2023, and expense ratios declined steadily. The company's consolidated gross margin in 2023 was +0.62 pct year on year to 23.88%, and the gross profit margin for the first quarter of 2024 was 24.04%, a slight decrease of 0.62 pct year on year. In 2023, the company's sales expense ratio/management expense ratio was +0.19pct/+0.07pct year on year, respectively, and -0.18pct/-0.1pct in the first quarter of 2024, respectively, with a steady, moderate year-on-year decline. The number of inventory turnover days in 2023 decreased by 3.19 days year-on-year to 61.15 days, and turnover efficiency improved. In terms of net operating cash flow, it was $1,614 million in 2023, +20.5% year over year, and 702 million yuan in 2024, +22.1% year over year, improving overall.

Risk warning: Store expansion falls short of expectations; same store falls short of expectations; snack and discount business falls short of expectations.

Investment advice: With the gradual recovery of industry demand and the company's own active adjustments, the company's store customer flow and in-store conversion rate have steadily recovered. At the same time, the online to home business is being promoted collaboratively, and omni-channel operation and service capabilities have been further improved. At the same time, as operations outside of Shandong Province gradually mature and profitability improve, performance flexibility is expected to gradually be unleashed. In the long run, the company will continue to consolidate supply chain construction capabilities and strengthen core barriers in the changing retail industry competition. Considering that emerging business formats such as the company's launch of snack volume sales and hard discount supermarket discounts in 2023 are still being nurtured, leading to an increase in short-term costs and expenses, we lowered the company's 2024-2025 net profit forecast to RMB 234/247 million (previous value: RMB 2.79 billion) and added RMB 274 million for 2026, corresponding PE of 28.5/25.9/23.3 times, respectively, to maintain “buying”.