Key points of investment:

Chongqing Department Store released a quick report on its 2024 semi-annual results. Revenue of 8.98 billion yuan was achieved in the first half of 2024, down 11.56% year on year (after adjustment, same below); net profit to mother was 0.712 billion yuan, down 21.06% year on year, after deducting non-return net profit of 0.704 billion yuan, down 13.06% year on year. The diluted EPS was 1.63 yuan; the weighted average return on net assets was 10.15%.

Brief review and investment advice.

1. The company's 1H24 revenue was 8.98 billion yuan, down 11.56% year on year (after adjustment, same below); net profit to mother was 0.712 billion yuan, down 21.06% year on year, after deducting non-return net profit of 0.704 billion yuan, down 13.06% year on year.

We estimate that 2Q24 revenue of 4.13 billion decreased by 18%, net profit due to mother of 0.277 billion decreased by 29%, and 2Q net profit of 0.258 billion yuan decreased by 26.5%.

2. The decline in net profit due mainly to the high base of investment income and non-recurring profit and loss. Net profit after deducting non-recurring profit and loss and immediate consumer investment income decreased by 4.52% year-on-year. Immediate consumption of 1H23's net profit increased by 130.71% year on year, resulting in a 20.66% year-on-year decrease in 1H24's net profit; the company's 1H23 non-recurring profit and loss was 91.69 million yuan, mainly due to fair value changes brought about by Dengkang Dental's listing transaction. 1H24's non-recurring profit and loss was 7.6 million yuan, down 91.71% year on year. In the first half of 2024, the company continued to reduce costs and increase efficiency, driving rent reduction. Labor costs and rental costs continued to decline. The company's net profit after deducting non-recurring profit and loss and immediate consumption investment income was 0.374 billion yuan, a decrease of 4.52% over the previous year. We estimate that net profit for 2Q24 decreased by about 18% after deducting non-deducted funds.

3. Actively explore new business formats and launch a “fresh+discount” super market. According to the official account of Chongqing Department Store, on May 28, the company's first “fresh+discount” store, the New Century Supermarket, officially opened. It focuses on the core logic of “optimizing and restructuring the supply chain”, reducing intermediate links and reducing costs through direct procurement from the source factory and bulk procurement; at the same time, it focuses on cost-effective products, high-quality products, upgraded services and commitment projects to provide consumers with the best quality products at discounted prices. The first store sold 2.188 million yuan in 6 days, and the average number of daily transactions was 6,200. On June 26, the second converted store opened. On the day of opening, store sales increased more than fivefold over the same period last year.

Update profit forecasts. Net profit for 2024-2026 is expected to be 1.34 billion yuan, 1.5 billion yuan, and 1.64 billion yuan, respectively, up 1.6%, 12.0%, and 9.5% year-on-year. We believe that adverse effects such as a high base are expected to be gradually eliminated starting in 3Q24. The company will continue to reduce costs and increase efficiency, actively explore new business formats for community supermarkets, and it is expected that the overall supply chain efficiency will be improved by optimizing some SKU procurement models. The company was given 12-15 times PE for the main retail business profit of 0.66 billion yuan in 2024, and 5 times PE for immediate financial investment income of 0.68 billion yuan; the segmented valuation gave a reasonable market value range of 11.3 billion to 13.3 billion yuan, and a reasonable value range of 25.28-29.71 yuan, maintaining a “superior to the market” investment rating.

Risk warning: Competition in the industry intensifies; improvements fall short of expectations; uncertainty about the immediate development of financial and innovative businesses.