The operation of factory stores in low-tier cities may exceed expectations. Our recent grassroots research found that Tourover and its IAM+O2O partners are operating well in low-tier cities, and that the car usage and maintenance frequency of most low-tier city car owners is stable. We expect that as Tourover opens new factory stores in low-tier cities this year and next, the revenue and profit contributions of low-tier city stores to Tourover will increase at an accelerated pace. Looking at high-tier cities, the price of tradable goods will indeed face some pressure in the first half of 2024, but judging from the current situation, the room for further price decline is expected to be limited, and Tourover can take the opportunity to increase the sales share of self-controlled/private brands, thereby expanding gross profit space.

The pace of opening new stores is steady, and 2024H1 is expected to achieve revenue of 6.95 billion yuan. We expect that in 2024-2025, the pace of opening new Tourover stores will maintain a net increase of 1,000 stores per year. This pace can help Tourover better achieve deep cultivation in low-tier cities, thereby achieving scale effects in product supply/store management. At the same time, gentle encryption of high line can also ensure the steady operation of existing high-tier stores. We expect Tourover's revenue for the first half of 2024 to record 6.95 billion yuan, +6.58% year over year, and adjusted net profit of 0.34 billion yuan, or +58.8% year over year.

The leading industry in terms of management granularity is a moat for the company. We believe that the core strength of the company is that it has a deep understanding of the uniqueness of the Chinese automotive aftermarket, is fully prepared to concentrate on the “bitter days of business”, and has strict self-requirements for the granularity of management. The core logic of the company's growth is to rely on its first-mover advantage to form a stronger voice in terms of scale, customers, brand, supply chain, etc.; the top-level logic of the strategy is based on the vast racetrack of the Chinese automobile aftermarket to follow the path of popularization and create value for society; the challenge is the strong localization of the auto repair industry, and there is sufficient competition in any segment. The growth of low-tier cities requires overcoming social dissatisfaction, and relying on local offline traffic to accumulate passenger traffic and monetize traffic.

Investment advice: The domestic auto service market is still in a stage of rapid development. As a leading online and offline integrated auto service provider, Tourover is expected to strengthen scale effects and build price barriers with an efficient supply chain, enhance brand image and strengthen brand effect through standardized & intelligent management, expand store size and seize market share through a franchise model; we expect the company to achieve net profit of 0.48/0.89/1.26 billion yuan in 2024-2026, respectively, corresponding to 27.37/14.72/10.43 times PE, giving a “purchase” ratings.

Risk warning: Industry competition increases risks, store expansion falls short of expectations, macroeconomic risks, etc.