Key points of investment:

The company released its 2024 semi-annual report. According to the company's announcement, 1) 24H1 achieved operating income of 5.186 billion yuan, +3.67% year over year; net profit to mother of 0.267 billion yuan, +3.81% year over year; and deducted non-net profit of 0.241 billion yuan, or +0.21% year over year.

2) The company's 24Q2 revenue was 2.515 billion yuan, +2.75%; net profit to mother was 0.103 billion yuan, -10.9% year-on-year, and non-net profit deducted from mother was 0.09 billion yuan, or -12.69% year-on-year, mainly due to a 42% decrease in investment income from joint ventures such as Xinwang Bank.

The management focus is on adjusting stores, and the channel layout is continuously optimized. The company decided on a development strategy centered in Chengdu and expanded to surrounding regions, and continued to promote work such as adjusting the product structure, adjusting store types, and upgrading. 2024H1 opened 16 new stores and completed the upgrading of 202 old stores. By the end of June 2024, the company had 3,655 offline stores. At the same time, the company increased investment in online platforms. 2024H1 attracted 5.35 million people to spend in stores through online channels, and achieved online sales of nearly 0.5 billion yuan. The company focuses on improving the consumer shopping experience, creating a convenient lifestyle circle with 5 minutes to the store, 5 minutes to buy, and 5 minutes home. The intensive store network has a good synergy effect. While reducing operating costs, it can carry out targeted marketing activities to cultivate a highly sticky consumer group. 24H1's main urban area/suburban district/secondary city/other business achieved 26.49/1.933/0.209/0.393 billion yuan respectively, an increase of 4.11%/4.69%/2.64%/-3.19% over the previous year. By category, household goods, food, tobacco, alcohol, and other businesses achieved revenue of 7.05/2.274/1.814/0.393 billion yuan respectively, +1.33%/+1.66% +9.02%/-3.19% year-on-year.

Expense control was good during the period, and the net profit of the main business continued to grow. 24H1's gross margin was 28.98%, -0.37pct year on year; 24Q2 gross margin reached 28.1%, down 0.5pct year on year. The 24H1/24Q2 company's expense ratio was 24.26%/24.14%, -0.27/-0.56pct year on year, of which the sales expense ratio was 21.94%/21.70%, -0.55pct/-0.85pct year on year, and the cost control effect was stable. 24H1 achieved net profit of 0.267 billion yuan to mother, +3.81% year on year, and realized net profit of main business 0.207 billion yuan, +6.14% year over year. Xinwang Bank and Gansu Hongqi achieved investment income of 59.36 million yuan, -3.57% year-on-year. 24H1 net profit margin was 5.14%, +0.01pct year over year. The 24Q2 company achieved net profit of 0.1 billion yuan, a year-on-year decrease of 10.9%. Net profit from the main business (after deducting investment income from joint ventures such as Xinwang Bank) increased 3.1% year-on-year to 0.082 billion yuan. Net profit margin for 24Q2 reached 4.1%, a year-on-year decrease of 0.6 pct.

Equity transfers are progressing steadily and are expected to provide new impetus for development in the long run. In December 2023, the company announced that the actual controller, Cao Shiru, and his co-actors, Cao Zengjun, and Yonghui Supermarket transferred part of their holdings to commercial investment. On June 18, 2024, the company announced that the Sichuan Provincial State-owned Assets Administration Commission has approved the share acquisition project, and the specific acquisition is still progressing steadily. Commercial investment is an enterprise under the Sichuan State-owned Assets Administration Commission. After the acquisition is completed, the company will change to a state-owned holding enterprise, which is expected to inject new development impetus into the company's long-term operations.

Maintain a buy rating. The company has formed a relatively complete store layout in Greater Chengdu and surrounding urban areas. With a complete supply chain and distribution system, the company has taken many measures to cultivate high-stickiness consumer groups. Moreover, the investment of state-owned shares in Sichuan is expected to become a new milestone in the company's development. We maintained the company's 24-26 net profit of 0.599/0.634/0.666 billion yuan, corresponding to PE of 10/9/9 times, respectively, and maintained the purchase rating.

Risk warning: Risk of continued increase in operating costs, risk of changes in market demand, and equity transfer progress falling short of expectations.