Incident: On April 19, the company released the 2023 and 2024Q1 performance reports. In 2023, the company achieved operating income of 17.763 billion yuan/-2.31%, net profit of 136 million yuan/year on year +127.04%, net profit of 99 million yuan/year over year +275.56%; 2023Q4 achieved operating income of 3.884 billion yuan/year on year -8.0%, net profit to mother - 72 million yuan (-133 million yuan for the same period last year), net profit after deducting -0.93 million yuan 100 million yuan (-144 million yuan in the same period last year); 2024Q1 achieved operating income of 5.189 billion yuan/year on year +5.73%, net profit to mother of 147 million yuan/year on year +7.10%, net profit after deducting net profit of 136 million yuan/year on year.

Strengthen the layout of stores in Shandong + focus on the quality of development outside the province, accelerate the expansion of new business formats, and the franchise model is gradually becoming the focus. 1) In 2023, the company accelerated the cultivation of new business formats such as Yueji Snack Shop and Haohuixing discount store, and strengthened the multi-format layout: 110 new stores were opened in 2023 (including 33 in Q4), 81 direct-run stores/franchise stores were 81 (57 closed) /29, and the total number of stores by the end of the period was 1,049, including 991/58 direct-run stores/franchised stores; by business format, the supermarket business/snack store/Haohuixing discount store/other business formats opened 37/56/7/10, respectively. The last stores were 895/53/7/ 94; Among them, Yueji Snacks opened its first store in April. After the business model was launched, it accelerated the expansion of stores and increased the number of franchises. Q2/Q3/Q4 opened 5/10/19 new direct-run stores, growing 56 throughout the year. Haohuixing Discount Supermarket opened its first store in June, and 1/1/5 new direct-run stores were opened in Q2/Q3/Q4. 2) Looking at the subregion, according to the “strong integration, stable two wings” strategy, the Shandong market density layout was strengthened. The two wing regions focused on development quality: 67 or 14 new direct-run stores were opened in Shandong province/outside the province, respectively. By the end of the period, the total number of stores in Shandong Province/outside the province had reached 859/132, respectively. 3) Simultaneous closure adjustments, and decisive closure of stores that continue to lose money and are difficult to change: 57 directly-operated stores were closed in 2023 (18 closed in Q4), and 49/8 stores were closed in Shandong and outside the province, respectively.

The gross margin was optimized throughout the year, and the overall cost ratio was relatively stable; online and offline integration was strengthened, and supply chain capacity continued to be strengthened.

1) On the gross profit side, the company's gross margin increased by 0.6 pct to 23.9% year on year in 2023, with gross margin of +0.44pct/+1.24pct to 19.57%/19.24% year on year in shandong/food washing/department stores, respectively, 0.53 pct/+0.47 pct/+0.81 pct, respectively. 2) On the cost side, the cost rate for the full year of 2023 was +0.15pct to 22.40% year-on-year.

During the reporting period, the company strengthened the impetus for high-quality development, continuously improved the operational efficiency and commercial strength of the logistics system, and continuously improved supply chain capabilities. In 2023, the proportion of its own brands and customized products reached 13.5%; at the same time, the store-to-home business collaborated and continued to strengthen online and offline integration. Online sales increased 23.9% in 2023, driving 3.06 million offline customers, and the in-store conversion rate reached 35%. At the end of the reporting period, the proportion of online supermarket business sales continued to increase, creating a better experience for consumers; continuing to promote organizational change. Set up a franchise division to improve the incentive mechanism and assessment and evaluation strength.

2024Q1, an increase in comparable store performance. 1) Revenue side: 2024Q1 achieved revenue of 5.189 billion yuan/year over year, mainly due to the increase in comparable stores and the addition of new stores. The number of direct-run stores/franchised stores added 12/8 during the period was 12/8, including 7 or 4 direct-run stores, including supermarkets, snack stores, and Haohuixing discount stores. By the end of the 2024Q1 period, the total number of stores reached 1,065, including 999/66 direct-run stores/franchisees respectively, and the number of Yueji Snacks/Haohuixing stores reached 67/8. 2) Profit side: 2024Q1's gross margin was -0.6pct to 24.0% year on year; due to the increase in sales scale, sales expense ratio/management expense ratio/financial expense ratio were -0.18/-0.10/-0.12pct year-on-year to 16.92%/1.86%/1.24%, respectively. In addition, in 2023, the company plans to pay a cash dividend of 0.19 yuan (tax included) per share for a total dividend of 120 million yuan, with a cash dividend ratio of 88%.

Investment suggestion: The company is a leading supermarket in Shandong. Relying on strong supply chain capabilities and fresh characteristics, the company's position in the province continues to be consolidated. Currently, in addition to deepening the coverage of advantageous regions and continuously encrypting stores, it actively covers regions other than Yanwei and regions outside Hebei and Anhui through mergers and acquisitions, franchises, etc., and has achieved some progress. Comparable stores in Q1 have grown, but based on the current competitive situation and the company's recent recovery, the company's net profit to 2024/2026 was adjusted to 2.23/2.37/253 million yuan, respectively. 26x PE, maintaining the “Overweight” rating.

Risk warning: Risk of high business concentration; expansion and same-store improvements falling short of expectations; macroeconomic risks.