2023 and 1Q24 results are in line with our expectations

The company announced full-year 2023 and 1Q24 results. 1) Finance: In '23, the company's revenue also increased by 43.76% to 2,401 billion yuan, of which sales revenue from restaurants and Fumao Hotels and Food was about 15.12/4.45/167 million yuan respectively; net profit after deduction of non-return to mother also increased by 240.03% to 253 million yuan, and the net interest rate corresponding to deducted non-return mother was 10.6%, which is in line with previous performance forecasts and our expectations. In 1Q24, the company's revenue also increased by 28.01% to 691 million yuan, and net profit to mother decreased by 8.84% to 65.9 million yuan. The year-on-year decline in net profit to the mother was mainly due to one-time housing levy compensation payments (about $12.16 million) and revenue from the value-added tax credit policy in 1Q23. Net profit after deducting non-return tax deductions increased 5.32% year-on-year, and the results were in line with our expectations. 2) Operation: In 2023, the company opened 8 new large-scale stores. By the end of the year, there were 106 stores directly managed by the company, including 53 Tongqinglou restaurants, 4 Fumao hotels, and 49 new brand stores. 1Q24 Company opened 3 new large stores. 3) Shareholder return: The company repurchased approximately 1 million shares in 23 years and distributed a cash dividend of 4.1 yuan to shareholders for every 10 shares, with a dividend payment rate of about 45% including the amount of shares repurchased.

Development trends

The plan is to open 12-18 new stores in 24; focus on changes in downstream demand in the catering and banquet market. 1) The expansion of the company's stores accelerated after the epidemic. Eight new large-scale stores were opened in '23 (4/2/2 of Tongqinglou Restaurants/Wedding Banquet Store/Fumao Hotel respectively). By the end of '23, the company had a total store area of 533,000 square meters, an increase of about 30%. In 1Q24, 3 new large-scale stores were opened (2 Fumao hotels and 1 Tongqinglou restaurant), and plans to open a total of 12-18 major restaurants and hotels in 24. We believe the company is expected to maintain a relatively rapid pace of store expansion in the future. 2) In terms of catering, we expect the same store to perform well in January-January, and began to decline in March; in terms of weddings, considering some retaliatory consumption characteristics in 23, we expect demand for wedding banquets to be under some pressure in '24. The company is currently actively promoting sales through joint events, etc., and it is recommended to continue to pay attention to changes in downstream demand and wedding reservation sales.

In Yingfumao, we are growing steadily and continuously tracking the climbing cycle and offsite expansion process of new stores. Up to now, there are 6 Fumao hotels in operation (5 of which are in Hefei and 1 in Fuyang). We estimate that Fumao Binhu had annual revenue of about 280 million yuan in 23, with a net interest rate of over 20%; Yaohai Fumao had annual revenue of nearly 140 million yuan, with a net interest rate of up to medium to high single digits; while Beicheng Fumao and Fuyang Fumao, which opened in '23, are currently still climbing. It is recommended to continue to pay attention to the progress of new stores and the impact of new store openings on overall gross margin.

Furthermore, in addition to Gaoxin Fumao and Feixi Fumao, which opened in January, the company plans to open in Anqing Fumao in May, Shanghai Fumao, or August. We believe that Shanghai Fumao is a further test of the company's ability to expand offsite. It is recommended to pay attention to its operating performance after opening and the company's subsequent offsite replication process.

Profit forecasting and valuation

Considering the continuous investment and food business channel and sales expenses brought about by the company's store expansion, we lowered our 2024/25 profit forecast by 9/ 9% to 3.4/430 million yuan, respectively. We maintained our outperforming industry rating and target price of 37.5 yuan, corresponding to 28/23x 2024/25e P/E (12/10x 2024/25eEV/eBitDA) and 37% upward space. The current stock price corresponds to 21/17x 2024/25e P/E (9/7x2024/25e EV/EBITDA).

risks

Consumption recovery fell short of expectations; store expansion fell short of expectations; food production capacity construction and climbing fell short of expectations, etc.