The company's revenue/profit in '23 was +0.1%/-5.4% year over year, respectively, and demand weakened slightly. 24Q1 revenue/profit was -17.9%/-46.9%, respectively. There was a net decrease of 7 franchisees in Q1. The progress of opening stores slowed down, and single-store revenue was under pressure in the short term. Looking ahead to the whole year, the company will focus on store quality, increase the development of the sinking market in East China, optimize wholesale channel customers, and actively explore supermarket customers and enrich channel diversification. Beef prices on the cost side have been falling steadily, and the company has taken the initiative to reduce prices and adjust prices to boost sales. It is expected that profitability will remain under pressure in the short term. We expect a recovery in downstream demand and an increase in production capacity utilization to improve profits. We expect EPS to be 0.76 yuan and 0.81 yuan in 24-25, corresponding to 37 times PE in 24 years, downgraded to an “increase” rating.
Incident: The company released its 2023 annual report and 2014 quarterly report. In 2023, the company achieved revenue/net profit to mother of 80/140 million, respectively, +0.1%/-5.4% year-on-year. Among them, 23Q4 revenue/net profit to mother was -5.7%/-13.9% year-on-year, respectively. The 24Q1 revenue/net profit attributable to mother was -17.9% and -46.9%, respectively. Revenue and profit were lower than previously anticipated. In '23, it is planned to distribute a cash dividend of RMB 0.7 (tax included) per share, with a dividend ratio of 70.9%.
The pace of opening stores has slowed, and demand has weakened slightly. In 23 years, franchise/distributor/wholesale/direct sales channels achieved revenue of 4.3/1.0/2.1/0.1 billion, +0.6%/-23.2%/-1.5%/+25.6% year-on-year, respectively. Of the net opening of 132 franchise stores in '23, there was a net increase of 25 affiliate stores in Q4, and the revenue of single franchise stores remained flat and declined slightly year-on-year in '23. As of the end of 24Q1, there were 1,816 franchisees, including a net decrease of 7 franchisees in Q1 and a net increase of 3 supermarket customers. The recovery in customer traffic fell short of expectations. There was a double-digit year-on-year decline in single stores in Q1, and the willingness of franchisees to open stores declined. Looking at the subregion, the East China market was -0.5% year over year in '23, the southwest grew relatively well (+76.0% year over year), and other markets were basically flat year over year. In 24Q1, the East China market fell 17.5% year-on-year due to the impact of franchisee store traffic, and the peripheral market remained basically flat.
Downward costs increased, investment returns declined, and the net interest rate in '23 was -1.0% year-on-year. Benefiting from the decline in beef prices in '23, the company's gross profit margin was 26.4%, +2.3 pct year on year. After the new factory was put into operation, office and intermediary expenses increased, and interest income increased. Sales/management/financial expenses ratio was +1.2%/+1.5%/-0.7% year over year, and the return on investment decreased by 100 million yuan, ultimately achieving a net profit margin of 16.9%, -1.0 pct year on year. Looking at Q4 alone, the sales/management/finance expense ratio was +1.3%/+2.8%-0.8%, and the 23Q4 gross margin/net margin was 27.2%/15.7%, respectively, +3.4%/-1.5%.
24Q1 revenue/profit year-on-year ratio was -17.9%/-46.9%. Product price reductions & expenses increased, and profits were under pressure in the short term.
24Q1 realized revenue/net profit of 17/0.2 billion, respectively, -17.9% and -46.9% year-on-year, and 24Q1 franchise/distributor/wholesale/direct sales channels were -16.1%/-20.4%/-24.9%/-19.0%, respectively. Affected by B-side downstream catering demand and C-end franchisee passenger flow, revenue was under pressure. The 24Q1 gross profit margin was 25.0%, -1.2pct year on year. The main reason was that the company actively reduced prices and adjusted to promote sales in the first quarter. The 24Q1 sales/management/financial expense ratio was +1.7%/+2.9%/-0.7% year-on-year, and the Q1 company achieved a net profit margin of 11.4%, -6.2 pct year over year, and profitability was under pressure in the short term.
24-year outlook: The C-side expects a recovery in demand, and the B-side increases market development. 1) C-side: In terms of regional coverage, the East China market accelerated channel sinking, and peripheral markets covered Anhui, Jiangxi, Hubei, Fujian, Chongqing and other places. The single-store side is expected to continue to improve the efficiency of single-store stores through store manager training, store optimization, and online channels. At the same time, product structure adjustments (rich, low value, cost-effective items) adapt to changes in consumer demand. In 23, a new supermarket team was added to take charge of supermarket channels, expand the business layout, and supermarket customers are gradually being developed. 2) B-side: Focus on large distributors to expand hotel catering and group dining customers. The supply-chain side prepared food fund-raising project with an annual output of 50,000 tons has been put into operation, optimizing the order structure according to customer conditions and improving production capacity utilization.
Investment advice: Operations are still under pressure; focus on recovering demand. The 24Q1 company's revenue and net profit to mother were -17.9% and -46.9%, respectively. There was a net decrease of 7 franchisees in Q1. The progress of opening stores slowed down, and single-store revenue was under pressure in the short term. Looking ahead to the whole year, the company will increase the development of the sinking market in East China, optimize wholesale channel customers, and actively explore supermarket customers to enrich channel diversification. Beef prices are falling steadily on the cost side, and active price reduction and adjustments drive sales. Profitability is expected to remain under pressure in the short term. It is expected that downstream demand will recover and capacity utilization will increase to improve profits. We expect EPS to be 0.76 yuan and 0.81 yuan in 24-25, corresponding to 37 times PE in 24, and downgraded to the “gain” rating.
Risk warning: macroeconomic impact, increased industry competition, falling short of expectations in opening stores, sharp rise in costs, demand recovery falling short of expectations, etc.