Incident: The company released its 2023 annual report and 2024 quarterly report. In 23, it achieved revenue of 8.046 billion yuan, -14.76% year on year; net profit to mother of 180 million yuan, or -46.26% year on year; deducted non-net profit of 65 million yuan, -68.82% year on year. Looking at a single quarter, 23Q4 achieved revenue of 2,046 billion yuan, -16.02% year-on-year; net profit to mother of 0.11 million yuan (0.48 million yuan in the same period last year), after deducting non-net profit of -57 million yuan (0.14 billion yuan in the same period last year). 24Q1 achieved revenue of 2,451 billion yuan, +2.79% year on year; net profit to mother of 62 million yuan, or -57.98% year on year; deducted non-net profit of 55 million yuan, or -48.69% year on year. The company plans to pay a cash dividend of 2.25 yuan (tax included) for every 10 shares to all shareholders in '23, and the total dividend accounts for 50.05% of net profit returned to mother in '23.

Adhere to the “good goods are not expensive” price strategy, and the store business continues to adjust. Channels: E-commerce/franchise/direct retail/ group buying business revenue was 31.67/24.0/18.94/490 billion yuan, respectively, compared to -32.58%/-6.67%/+21.69%/-0.51%. The e-commerce decline was mainly affected by platform changes; in terms of stores, the number of company franchised/directly managed stores by the end of 23 was 2037/1256, respectively (net change -191/+258).

24Q1 e-commerce, franchise, direct retail/ group buying business was +6.65%/-16.0%/+10.16%/+57.32% year-on-year. Online growth was steady, store-side adjustments continued, and group buying performance was outstanding.

Subregions: Central China/Southwest/Southwest/North China/North China and Northwest China generated 21.32/6.83/5.63/197 million yuan, respectively, +0.47%/+8.20%/+19.02%/+21.0% YoY; East/Other (mainly referring to group purchases and e-commerce) revenue was 7.19/3.658 billion yuan, respectively, -2.71%/-29.54% YoY.

The gross profit of product price adjustments has declined, and the scale of revenue has declined, and cost efficiency has decreased. In '23, the gross profit margin was 27.75%, +0.18 pcts year on year; starting in 23Q4, the company adjusted product prices, focusing on snacks that optimized cost but did not affect quality and high repurchase rates. 23Q4 gross margin was -0.43 pcts to 25.43% year over year, and 24Q1 gross margin -2.74 pcts year over year to 26.43% year over year. On the cost side, the 23-year sales/management/R&D/finance expense ratio was 19.55%/5.55%/0.54%/-0.14%, respectively, compared with +0.94/+0.47/+0.01/+0.24pcts. The increase in the cost ratio is expected to result in a slight decrease in revenue and cost efficiency. The deduction of non-net interest rate of 0.81% was achieved in '23, -1.4pcts year on year; in 24Q1, the non-net interest rate of 2.24% was deducted, -2.25pcts year on year.

Investment proposal: In 24, the company will focus on improving the efficiency and quality of store business operations, strengthening the product innovation system, and actively communicating product value. We expect the company's 2024-2026 revenue to be 81.6/83.5/8.45 billion yuan, respectively, +1.4%/2.3%/1.2%, net profit to mother of 1.4/2.0/ 230 million yuan, respectively, -24.0%/+45.7%/+13.9% YoY. The PE corresponding to the current stock price is 43/30/26x, respectively, maintaining the “recommended” rating.

Risk warning: Store expansion falls short of expectations, raw material prices have risen sharply, industry competition has intensified, and food safety risks.