The company released its 2023 annual report and 2024 quarterly report. In 2023, revenue of 17.763 billion yuan was achieved, down 2.31% year on year; net profit to mother was 136 million yuan, up 127.04% year on year, after deducting non-net profit of 0.99 million yuan, up 275.56% year on year, diluted EPS of 0.25 yuan, weighted average return on net assets of 5.68%, and net cash flow from operating activities was 1,614 billion yuan, up 20.50% year on year.
1Q2024 achieved revenue of 5.189 billion yuan, up 5.73% year on year, net profit to mother of 147 million yuan, up 7.10% year on year; after deducting non-net profit of 136 million yuan, up 1.05% year on year, diluted EPS of 0.24 yuan, weighted average return on net assets of 5.71%.
2023 dividend plan: Cash dividend of 1.90 yuan (tax included) for every 10 shares.
Brief review and investment advice.
1. Revenue in 2023 fell by 2.31%, opening 110 stores; 1Q24 revenue increased 5.73%, opening 20 stores.
2023: ① By product, fresh revenue was 7.049 billion yuan, down 7.49% year on year; food washing revenue was 8.687 billion yuan, up 2.46% year on year; department store revenue was 616 million yuan, down 1.16% year on year. ② By region, revenue within and outside Shandong Province increased by -3.45% and 4.49%, respectively. Same-store revenue fell 2.17% in 2023. Among them, supermarkets, community fresh supermarkets, rural supermarkets, department stores, and other same-sector stores changed -0.24%, -5.84%, -2.23%, -26.01%, and -8.41%, respectively.
1Q24: ① By business type: comprehensive supermarket, community fresh food, and rural supermarket revenue each increased by 10.96%, 5.16%, and 4.16%.
② By region: Revenue within and outside Shandong Province increased by 8.63% and 9.81%, respectively.
2. Focus on key areas and further optimize the store structure. ① In 2023, 110 new stores were opened, including 81 new direct-run stores and 29 franchise stores; by business type, 37 new supermarkets, 56 snack stores, 7 Haohuixing discount stores, and 10 other businesses were opened. ② In 1Q24, the company opened 12 new direct-run stores, added 8 new affiliate stores, opened 2 new direct-run supermarkets, 5 community fresh supermarkets, 4 snack stores, and 1 Haohuixing discount store. By the end of the first quarter, the total number of company stores was 1,065, with 999 direct-run stores and 66 franchise stores; by business type, there were 261 general supermarkets, 409 community fresh food supermarkets, 227 rural supermarkets, 67 snack stores, 8 Haohuixing discount stores, and 93 convenience stores.
3. The gross profit margin increased by 23.88% by 0.62 pct in 2023, and the gross profit margin decreased by 0.62 pct by 24.04% in 1Q24.
2023: Gross margins of +0.53, +0.47, and +0.81pct by product, fresh food washing, and department stores, respectively.
By region, the gross margin of direct stores was +0.44 and +1.24pct, respectively; 1Q24: The gross profit margin of direct-run stores was 19.40%, a year-on-year decrease of 1.01pct. By business format, general supermarkets, community fresh food supermarkets, rural supermarkets, and other business categories, gross margins were -0.78, -1.10, -2.17, and -2.92pct, respectively; by region, gross margins within Shandong and outside the province were -1.12 and -0.55pct, respectively.
4. The cost rate increased by 22.40% by 0.15 pct during 2023, and the cost rate decreased by 0.44 pct by 20.08% during the 1Q24 period. 2023: The sales expense ratio increased by 18.85% by 0.19pct; the management expense ratio increased by 2.12% by 0.07pct; the financial expense ratio decreased by 1.36% by 0.20pct; and the R&D expense ratio was 0.07%. 1Q24: Sales expense ratio 16.92% reduced 0.18pct; management expense ratio 1.86% reduced 0.10pct; financial expense ratio 1.24% reduced 0.12pct; R&D expense ratio 0.06% reduced 0.03pct.
5. In 2023, net profit of 136 million yuan increased by 127%, Inner Mongolia reversed losses, and Hebei Huaibei significantly reduced losses. Total profit in 2023 was 212 million yuan, up 118% year on year; net profit to mother was 136 million yuan, up 127% year on year; after deducting non-net profit of 99 million yuan, up 276% year on year. Among the main subsidiaries, Qingdao Weike (100%) has revenue of 744 million yuan, operating profit of 30.67 million yuan, Hebei Jiajiayue (95%) revenue of 584 million yuan, operating loss of 23.56 million yuan, Inner Mongolia Velehui (70%) revenue of 936 million yuan and operating profit of 27.15 million yuan, Anhui Awesome (75%) revenue of 808 million yuan and operating loss of 20.64 million yuan. We estimate that the combined equity losses of our subsidiaries in Hebei, Inner Mongolia and Anhui will be reduced by more than 80% in 2023.
1Q2024, net profit to mother was 147 million yuan, up 7.10% year on year. Net profit after deducting non-return to mother was 136 million yuan, up 1.05% year on year. 1Q24 achieved steady growth against the backdrop of a high base of 1Q23.
6. Strengthen basic management, reduce costs and increase efficiency to improve management capacity
(1) Pay close attention to basic management to enhance the impetus for high-quality development. The company focuses on customer value and focuses on the quality and content of stores. According to the actual situation in different regions, the quality of store operation has improved markedly. At the same time, the quality of store operations has improved markedly. Through demonstration store upgrading projects, the company has continuously optimized traditional business formats, promoted store upgrades, and achieved good performance growth.
(2) Firmly promote innovation and transformation to improve operational efficiency and consumer experience. The company continuously optimizes information systems, improves system usage efficiency and collaboration efficiency, and enhances operation and management capabilities. The logistics “scheduled delivery” project was launched, and the on-time delivery rate of delivery vehicles reached more than 80%, improving logistics's delivery service capabilities to stores; online sales increased by 23.9%, driving 3.06 million offline customers. The in-store conversion rate reached 35%, and omni-channel operation capabilities continued to increase. By the end of 2023, supermarket online business sales accounted for 5.98%.
(3) Strengthen logistics systems and commercial power, and continuously improve supply chain capabilities. The Huaibei and Shanghe Logistics Park continues to strengthen infrastructure construction. Various logistics functions have been continuously improved, and the coordination and linkage between logistics headquarters and regions, logistics and stores has been continuously improved. Distribution efficiency and satisfaction rates have continued to improve, helping stores to remove inventory with obvious results, and the overall operation efficiency continues to improve. Private brands accounted for 13.5% of revenue in 2023.
Maintain judgment on the company. ① Strong core competitiveness: intensive regional layout, multi-format collaboration, supply chain construction, building competitive barriers; ② Continued loss reduction trend outside the province: Since 2022, under effective control, the three provinces have seen significant loss reduction trends. We believe that stabilizing the same store and reducing losses outside the province are expected to jointly release the company's profit elasticity over the next three years. ③ Innovate and test the waters of a new business format: The snack chain brand “Yue Ji Snack” was launched. The business model based on this business model has basically worked. Franchise cooperation has been opened to accelerate market expansion, while actively refining the “Haohuixing” hard discount store model to enhance the collaborative advantages of multiple business formats.
Update profit forecasts. Net profit for 2024-2026 is expected to be 273 million yuan, 306 million yuan, and 334 million yuan respectively, up 100%, 12%, and 9% year-on-year; the current market value corresponds to 2024-2026 PE 22 times, 20 times, and 18 times, respectively, and 0.31 times, 0.29 times, and 0.26 times PS, respectively. Considering that the company is actively innovating its business format and the trend of loss reduction outside the province is even more clear, it was given an investment rating of “superior to the market” by 0.45-0.55 times PS in 2024, corresponding to a reasonable market value range of 8.7 billion yuan to 10.6 billion yuan, and a reasonable value range of 13.61 to 16.64 yuan.
Risk warning. The speed of opening stores and integration results fell short of expectations; the offsite cultivation period was lengthened; e-commerce channels were diverted; and competition intensified.