Incident: The company released its 2023 annual report, achieving revenue of 2,744 billion yuan, an increase of 17.1%, and realized profit attributable to shareholders of the company of 116 million, an increase of 357.1%. The company's performance was in line with market expectations. The company declared an annual dividend of HK$0.05 per common share of the Company for 2023, totaling approximately RMB 108 million, with a dividend rate of 93.5%.

Investment rating and valuation: Based on cautious assumptions about the recovery of downstream consumption scenarios, we expect the number of stores to be 4036 or 4346 in 24-25 (4666 or 5476 before 24-25), lower the 24-25 forecast, add a 26-year forecast, and forecast the company's net profit to the mother in 2024-2026 of 2.07, 2.54, and 308 million ($399 million and 497 million yuan respectively), up 79%, 23%, and 21%, respectively. The corresponding 24-26 PE is 19x, 16x, and 13x, respectively. We gave comparable companies an average valuation of 21xPE for 24 years. There is still room for 8% compared to the current stock price, and maintain an increase rating. The company continues to deepen six major strategic reforms, open up franchises, increase store expansion efforts, refine takeout operations to expand the radiation radius of stores, actively expand emerging channels to reach young customers, enrich the product matrix to form a new generation of large products, and optimize the supply chain to reduce costs and increase efficiency. Focus on the high flexibility of store efficiency recovery in the short term, and focus on the greater space brought by the company to deeply reach consumers through online and offline channels in the medium to long term.

Accelerate the layout of transportation hubs, and the resumption of direct business is better than franchise business. According to the company announcement, by channel, self-operated store/online channel/franchise business achieved revenue of 1,466/396/783 million yuan in 2023, respectively, or 26.9%/-5.1%/13.0% year-on-year.

Looking at the split of stores, as of the end of the reporting period, the company had a total of 3,816 stores, including 1,720 direct-run stores/2,096 stores respectively, a net increase of 274 or 113 compared to the end of '22. The average single-store revenue of directly-managed stores/franchised stores in '23 was +7.9%/-2.5%, respectively. Directly managed stores have benefited from the restoration of passenger traffic at transportation hubs, and the average revenue recovery of individual stores is relatively good. Looking at the store structure, the company currently has 319 transportation hubs, commercial district businesses and supermarkets/community stores/396 other stores, respectively, with a net increase of 141 homes, 157 homes, 53 homes, and 36 stores respectively. The company accelerated the layout of transportation hub stores, and the number of transportation hub stores increased by 3.2 pct to 8.4%. In addition, the company launched a 2-in-1 store with frozen fresh & hot halide, which is expected to accelerate the layout of the community scene in the future. The company uses takeout services and e-commerce platforms to reach consumers in a variety of ways. Among them, the home delivery business focuses on takeout platforms and invigorates the supper scene. In '23, sales of takeout terminals included tax were 853 million, and sales of supper terminals including tax were 133 million. The in-store business attracted stores through Douyin Lifestyle Services, Meituan Dianping, etc. In 2023, GMV was close to 80 million, and the write-off rate was over 70%.

Profitability is gradually being restored. According to the company announcement, the company achieved a gross profit margin of 52.4% in 2023, a year-on-year decrease of 2.6 pct. The price of the main duck side dish is high. In terms of cost ratio, the company's sales/management expenses rate in '23 was 35.8%/11.5%, respectively, -3.9 pct/-1.7 pct, respectively. Thanks to cost ratio optimization, the company's net interest rate increased by 3.1 pct to 4.2% in '23.

Core hypothetical risks: fluctuating raw material prices, food safety issues