The 2023 annual report results are near the median forecast range, and “dividend+repurchase” highlights the positive attitude of state-owned enterprises.

In 2023, the company achieved revenue of 12.224 billion yuan/ +13.19%. Excluding store changes, the same store increased 11.19% year on year; net profit attributable to shareholders of listed companies was 709 million yuan/ +264.14%, after deducting non-performance of 635 million yuan/year-on-year loss, all of which were close to the median performance forecast, in line with expectations. The company plans to pay out 2.00 yuan (tax included) for every 10 shares, with a dividend rate of 32% and a dividend rate of 1.60%. At the same time, the company plans to invest 100-20 million yuan in pooled bidding within the next year to reduce registered capital, and the repurchase price will not be as high as 17.50 yuan/share. The company's controlling shareholders, directors and supervisors have no plans to reduce their holdings for the next 3-6 months.

Downhill losses from tax exemptions and new taxable programs dragged down the company's 2023 performance. Compared with 2019 (compared with Wangfujing+Shoushang Co., Ltd.), the company's return to parent performance and non-return performance only recovered by around 50%, mainly due to a combination of factors such as gradual recovery in consumption, tax exemptions, and a drag on the climbing period of new taxable projects. Among them, the estimated loss on net profit in 2023 from tax exemption and new taxable projects dragged down about 450 million yuan, directly affecting the company's short-term operating performance. New business formats, the cultivation period of new stores, and high-rent projects with long-term leases are greatly affected by the new leasing guidelines in the early stages of leasing, causing a significant drag on profits. Excluding its impact, we estimate the operating performance of other projects at 1 billion +. Considering the gradual recovery in consumption, the overall contribution is still relatively stable.

Taxes: Olay's business recovered the fastest in 2023. Supermarkets are under relative pressure, and new projects are being dragged down a lot. In 2023, the company's revenue was +35.09%/+16.35%/+7.69%/+6.22%/-18.51%. Olay grew the fastest, and supermarkets declined year-on-year due to reduced scale and increased competition. At the gross margin level, Ole and Department Store projects each increased by 5.49/4.83 pct, while the rest was relatively stable. 2023Q4, the company opened 1 new Ole (Beijing), 2 shopping malls (Beijing, Haikou), etc., and the profit loss in 2023 dragged down the estimated 200 million+, affecting the company's short-term taxable business profit performance.

Tax exemption: In 2023, the outlying islands of Wanning in Hainan were duty-free, and Hainan is still in the cultivation period under tax exemption pressure. In January 2023, the company launched a new duty-free project for the outlying islands of Wanning, Hainan. In 2023, the company achieved tax-free revenue of 187 million yuan (accounting for 1.53% of revenue) and a gross profit margin of 19.19%. Due to the overall pressure on Hainan Duty Free in 2023, and the growth period for new projects climbing, it is estimated that the company's cumulative losses in tax exemption-related projects will drag down more than 200 million yuan in 2023.

Revenue remained flat in the first quarter, with returns falling 11%. 2024Q1, the company's revenue was 3.308 billion yuan/ -1.74%, and the mother's performance was 202 million yuan/ -10.86%, after deducting non-performance of 193 million yuan/ -13.72%. By business, department store/shopping center/outlet/supermarket/specialty store revenue was -11.25%/+3.52%/+9.45%/-31.06%/-4.98%; duty-free revenue was 121 million yuan/ +116.78%, gradually climbing the slope.

Risk warning: Macro and systemic risks, new projects falling short of expectations, online diversion, increased competition, etc.

Investment advice: Lower the profit forecast and downgrade the rating to “increase holdings”. Considering the overall consumption environment and the continued pressure on the Hainan duty-free market, we lowered our expectations for the operating performance of the Hainan Wanning Duty Free Project (see attached table).

At the same time, under the new leasing guidelines, some of the company's long-term lease high-rent projects have higher upfront leasing costs, so the new projects are clearly dragging down early losses amid the gradual recovery in consumption. In view of this, we have revised the profit assumptions relating to the company's four new tax-free and taxable projects. We expect that the new projects mentioned above will still be hampered by losses in 2024-2025, and at the same time slightly lower the operating performance of the company's other projects in line with the current pace of consumption recovery. Overall, the 2024-2026 EPS was reduced to 0.74/0.85/1.00 yuan (at the beginning of July last year, the 2024-2025 EPS was expected to be 1.17/1.37 yuan, adding 1.00 yuan to the 2026 EPS), corresponding to a valuation of 19/16/14x.

The company's new business format and new projects are being dragged down in the short term “under the gradual recovery of consumption+new leasing guidelines,” but currently under pressure from state-owned enterprise profit assessments, etc., the company has multiple management divisions to optimize their stock operations, especially some of these undermanaged projects. The company's dividends and buybacks also partly reflect a positive attitude. Integrate potential highlights, policy opportunities, etc. of the company's state-owned enterprise reform, consider the current consumption environment and business performance, and downgrade the rating to “increase holdings.”