The scale of the pizza circuit is growing faster than that of the catering industry as a whole. The penetration rate increases, and the Chinese pizza market is about 37.5/77.1 billion in 2022/2027E. The CAGR is expected to reach 15.5% in the next 5 years, which is faster than the overall growth rate of the catering industry. Increased penetration rate is expected to be a major driving force for the growth of the industry, benefiting from the increase in the acceptance of sweet cheeses among young people and the rapid penetration of the takeaway market during the epidemic. The number of pizza stores per million people in China in 2022 was only 11.7, less than half the level of Japan and South Korea. Since the current chain rate and concentration of pizza racetracks are higher than other catering tracks, there is plenty of room for growth.

Dashi is positioned as a pizza delivery expert. In a period of rapid growth, with rapid store opening, same store growth, and increased profits, Dashi Co., Ltd. is the domestic franchisee of Domino, the world's largest pizza brand, and the third largest pizza company in China.

Entered the Chinese market in 1997, and was initially deeply involved in Beijing and Shanghai. Since 2017, it has accelerated expansion, and has achieved positive same-store sales growth for 27 consecutive quarters since 2017 Q3. The company achieved revenue of 3.05 billion yuan (2019-23CAGR 38%) in 23, and the number of stores reached 768 at the end of 2023 (2019-23CAGR 30%). The same store sales growth rate was 9%/19%/14%/9% in 20-23; the operating profit margin of the store in '23 was 13.8% /yoy+3.7pct, net profit to mother/adjusted net profit of -0.027/0.009 billion yuan, and profitability continued to improve.

The mature markets in Beijing and Shanghai contributed more than 50% of revenue. In 19-23, the CAGR was 22% to 1.55 billion, the number of stores was 18% CAGR to 351, and the daily CAGR of a single store was 2% to 0.0129 million yuan. Emerging markets rapidly expanded and grew rapidly. In 19-23, the CAGR was 83% to 1.51 billion, the number of stores was 48% CAGR to 417, and the daily sales CAGR of a single store reached 20% to 0.0123 million.

Brands that are deeply involved in the takeout market in first-tier cities have strong potential, and the supply chain has energy for continuous expansion 1) The products are delicious and chewy: the central chef supports refrigerated dough (which has a better taste than frozen dough from a factory and is more efficient than freshly made in stores), and is supported by Domino's confidential recipes. Continued localization and promotion has launched more than 120 new dishes since 2018. The pricing is comprehensive and cost-effective, and provides a wide range of price options. According to Narrow Door, Domino's unit price per person (57.86 yuan) is lower than Pizza Hut (69.88 yuan), etc. 2) The advantage of takeout is the fastest delivery: We believe that the pizza category fits the non-dine-in scenario (the in-store plus sharing scenario is not superior). Domino's focuses on takeout delivery in 30 minutes and 91% of orders are delivered in 23 minutes. Thousands of riders own their own riders account for 59% of takeout sales. Takeout encryption has a better delivery experience (concentric store expansion) and support from central chefs (Mikawa, Shanghai, and Dongguan radiates 350 km), so encryption will dilute the problem of the same store and weaken (clearly different from dine-in restaurant brands). 3) Organizational management empowerment: The CEO (McKinsey & McDonald's experience) has improved management and accelerated development since 17 years in office, and same-store sales growth has been positive for 27 consecutive quarters since 17Q3. The management framework is complete, and the back-office system is empowered.

The single-store model is excellent and there is still room for optimization. It is in the golden period of opening a store, and the company's overall store operating profit margin continues to rise. In 23 years, weighted single-store revenue of 4.5 million yuan (average daily sales of a single store was 0.0126 million yuan), and the operating profit margin rose to 13.8%, slightly surpassing Pizza Hut. The company's new markets grew rapidly. The average daily sales of a single store in 23 years were +36.4% (higher than the overall +10.0%). Some new markets performed well, such as the first-day sales of the first store in Chengdu reached 0.16 million/ the first-month sales volume of the first store in Qingdao reached 4 million. In terms of store opening space, according to the prospectus, the company plans to open 180/240 new stores in 23/24, and 200-300 new stores in 25/26, corresponding to the target number of 1408-1608 stores in 2026, saving double the space. Based on store density estimates in tier-level cities, the total number of stores in second-tier cities alone may reach 2,300, and there is plenty of room to open.

Profit forecast and investment advice: We believe that as the leader of the pizza circuit, the company has strong growth potential and is expected to achieve continuous expansion in the Chinese market. We are optimistic about subsequent store expansion, cost reduction and efficiency improvement & profitability improvement under headquarters cost dilution. It is expected to achieve revenue of 3.98/5.14/6.57 billion yuan in 24/25/26, +30.6%/+28.9%/+27.9%, achieving adjusted net profit of 0.05/0.11/0.26 billion yuan, +449.8% /+ 133.2%/+128.6%. Considering that the company is in the golden period of store opening and growing, and profit margins are expected to gradually improve, the 24-year target PSG0.07X is given based on the PSG level in the same industry, corresponding to a target market value of 8.74 billion yuan and a corresponding target price of 72 HKD. For the first time, coverage gave an “increase in holdings” rating. It is recommended to pay attention.

Risk warning: New stores fall short of expectations, food safety risks, rising raw material prices, competition exacerbates risks