The mushroom business started and opened up a second growth curve by mass-selling snacks. At the beginning of its establishment, Wanchen Group's main business was fresh edible fungus products. It entered the mass-selling snack circuit in August '22, merged its four major brands into Wangxie in October '23, and was deeply tied to a team of outstanding founders through equity cooperation, making it a leading position in the industry. The snack sales business achieved revenue of 8.759 billion yuan in 23 years. As of April '24, the number of stores I really wanted to visit reached 5,200+, and about 550 new stores were opened every month, and the number of stores for my wife exceeded 1,000. The equity incentive plan was launched in '24. The revenue incentive target for 24/25/26 is 20/22/24 billion yuan, and 24Q1 has achieved revenue of 4.83 billion yuan. With the rapid expansion of the number of the company's stores, the incentive target is expected to be successfully achieved.

Industry pattern: Two super strong patterns have been established, and the market share is expected to be further concentrated on the busy snack series and the Wan Chen series. According to the “White Paper on Hard Discounts on Chinese Snacks”, the revenue of the mass snack industry is estimated to be 70-80 billion yuan in 23 years, and the number of stores is expected to be 0.022 million-0.025 million. In recent years, leading brands have continuously carried out mergers and acquisitions, and industry concentration has increased. Currently, it has formed a “two super strong” pattern dominated by busy snacks and Wanchen Group. We believe that scale is the core competitive factor in the current stage of competition. Strong leading companies will be strong, and market share will be further concentrated in the top two, and it is difficult for a third company to enter the first tier. We expect 76,619 mass snack stores to open in the long term, and the revenue of the mass snack industry to reach 229.9 billion yuan, all with room for more than double.

Company advantages: leading scale, multi-dimensional brand & investment & operation to build a deep moat. 1) Leading in scale: As of April '24, the total number of the company's stores (I really want to come, my wife) was over 6,200. The dominant area was the East China market. The number of stores in Shandong, Jiangsu, Anhui, Zhejiang and other provinces reached 1,000 stores, far ahead of competitors. Other regions increased their layout and initially achieved a nationwide layout. 2) Brand management: Unify multiple brands as well, and unified operation helps enhance brand potential. 3) Investment promotion: A comprehensive online and offline brand promotion briefing will reach more potential franchisees, and strong location selection capabilities and standardized operation systems will enable franchisees to open stores. 4) Store operation: Cooperative brand suppliers continuously improve product power, build a membership system to enhance consumer stickiness, actively lay out Douyin to strengthen brand promotion, and empower offline stores.

The scale effect helps improve profitability, and minority shareholders' equity is expected to recoup increased profits. 1) In order to support store expansion, it is necessary to proactively invest in storage, team building, etc. As the scale continues to expand and bargaining power continues to increase, gross margin is expected to increase, and the cost ratio is expected to continue to be diluted. It is expected that there is still plenty of room for improvement in net interest rates. 2) Most of the company's brands operate as joint ventures. The company's shareholding ratio is low, and minority shareholders account for a large share of profit and loss. If the subsidiary performs well in the future, it is expected that shares will be recovered and profits increased through the original acquisition agreement.

Investment advice: We expect the company's 2024-2026 revenue to be 26.604/42.163/54.594 billion yuan, respectively, up 186.26%/58.49%/29.48% year on year. The company is expected to achieve net profit of 0.166/0.391/0.627 billion yuan in 2024-2026, up 300.09%/135.84%/60.11% year on year, respectively, corresponding to PE 20.8/8.8/ 60.11% year-on-year 5.5X, giving it a “Recommended” rating.

Risk warning: store expansion is not as fast as expected, industry competition intensifies, food safety risks, etc.