Incident: The company's 2023 revenue was 17.763 billion yuan, -2.31% year on year, net profit of 136 million yuan, +127.04% year on year, net profit of 98.71 million yuan after deducting non-return to mother net profit of 98.71 million yuan, +275.56% year on year, and 88% dividend ratio in 2023. 2024Q1's revenue was 5.189 billion yuan, +5.73% year-on-year, net profit to mother was 147 million yuan, +7.10% year-on-year, and net profit after deducting non-return to mother was 136 million yuan, +1.05% year-on-year.

The opening of the new business format is progressing smoothly, and the growth performance of the same supermarket stores is relatively good. As of 2024Q1, the company had a total of 1,065 stores, including 897 supermarkets, 67 snack stores, 8 Haohuixing discount stores, and 93 convenience stores. 2024Q1 added 2 supermarkets, 14 snack stores (including 10 joined), and 1 discount store. The new business format is gradually expanding, which is expected to bring new growth points to the company's performance. Driven by the new business format, the revenue of 2024Q1 direct-run stores from other business categories increased by 46.66% year-on-year. The number of new stores opened in the 2024Q1 supermarket business is limited, but the revenue growth rates of supermarkets, community supermarkets, and rural supermarkets are 10.96%, 5.16%, and 4.16% respectively. It is expected to be mainly a contribution to same-store growth. The company will strengthen online and offline integration, optimize category structure, and improve basic management such as display and service in 2023. The results have now been shown.

Expense rates have changed relatively steadily, and losses have been reduced significantly outside the province. The company's expense ratio for the 2023 period was 22.40%, +0.15pct year on year, 20.08% during 2024Q1, and -0.44pct year on year. Expense control was relatively stable. The gross margin of regions outside the province in 2023 was +1.24pct year-on-year to 19.24%, close to the level within the province (19.57%). In 2023, the Hebei and Anhui markets drastically reduced losses, and the Inner Mongolia region turned losses into profits, with operating profit of 27.15 million yuan (2022 - 65.16 million yuan).

Investment advice: The company is a leader in regional economies and has established strong channels and supply chain barriers in the Yanwei region, the core market. In the short term, I am optimistic that the moderate recovery in CPI will boost supermarket stores. In the medium to long term, there is still plenty of room for improvement in the market share of the Yanwei region in Shandong Province. The loss situation of stores outside the province has improved drastically, the ability to expand offsite is gradually becoming prominent, and the medium- to long-term growth path is clear. The company has entered a booming circuit of mass-selling snacks and discount stores, which is expected to open up room for further growth. We expect the company's net profit to be 3.15/3.78/423 million yuan in 2024-2026, corresponding to PE21.0/17.6/15.7X, maintaining the “gain” rating.

Risk warning: The risk that macroeconomic recovery falls short of expectations, expansion outside the province falls short of expectations, market competition intensifies, and new business formats fall short of expectations.