Incident: Wanchen Group released its annual report for the year 23. It achieved revenue of 9.29 billion yuan, +1592% over the same period. It was mainly due to the rapid development of the company's snack sales business, achieving net profit of -83 million yuan. Net profit to the mother was negative due to price fluctuations in the main product of the mushroom business, enoki mushrooms, which led to losses and amortized equity incentive expenses for 23 years.

Comment:

The rapid opening of stores within 23 years dispelled the market's doubts about the company's ability to manage and operate. The company achieved mass sales revenue of 8.76 billion yuan for the full year of '23. The rapid growth in business revenue further validates the competitiveness of the mass snack business model and the company's excellent team strength and incentive mechanism. At the end of '23, the number of stores reached 4,726. The market questioned the company's team's ability to expand and operate. The existing stores were mainly newly opened in '23 and had excellent single-store performance, which is expected to dispel the market's doubts about the company's ability to operate.

Due to scale effects and continuous improvement in supply chain efficiency, the profitability of the company's mass snack sales business increased quarterly. The gross margin of the 23H2 mass-selling snack business increased from 7.9% of 23H1 to 9.99%, and the 23H2 sales expense ratio was 4.67%, down 1.09pct from 23H1. Excluding equity incentives, the net margin of 23Q4 mass-selling snacks was 1.82% (23Q1/23Q2/23Q3 were -2.03%/-2.23%/0.18%, respectively). Profitability continued to verify the competitive advantages of the mass-selling snack business model compared to traditional channels, which also showed the relative establishment of the current market competition pattern and the company's internal competitiveness Continued improvement in efficiency.

The turnover efficiency of mass-selling snacks is high, and the cash flow is steady. The company's sales revenue in '23 was 10.6 billion yuan, matching revenue. The net cash flow from operating activities was 1,023 billion yuan, and the cash flow performance was good. At the end of '23, the company's cash was 1.21 billion yuan. Abundant cash can better support the development of the business. At the end of the year, the inventory turnover of the company's snack sales business remained basically 10-15 days. The turnover efficiency of the business was significantly higher than that of traditional snack retail channels.

Profit forecast and investment rating: Looking ahead, as a business format with higher channel efficiency, the industry is still in the dividend period of rapidly increasing penetration. The key points of competition are mainly in supply chain efficiency (scale) and differentiation. Wanchen Group currently has a leading edge in Jiangsu, Zhejiang, Anhui, Shandong and other regions, and the competitive landscape is now further established. As the first tier brand in the industry, Wanchen Group continues to deliver results to verify the company's ability to operate. Under the scale effect, the company's profitability is expected to be further reflected. We expect the company's 24-26 earnings per share of $0.87, 1.85, and 2.45, maintaining the company's “buy” rating.

Risk factors: Increased competition in regional markets, price wars in the industry, multi-brand operating capacity falls short of expectations, and food safety issues.