On August 27, 2024, Huangshanghuang released the 2024 interim results report.

Key points of investment

Revenue decline has slowed month-on-month, and gross margin has improved

The company achieved mid-term revenue of 1.06 billion yuan in 2024 (same decrease of 7.53%) and net profit to mother of 0.061 billion yuan (same decrease of 26.59%). Among them, 2024Q2 revenue was 0.603 billion yuan (same decrease of 5.10%), and net profit to mother was 0.028 billion yuan (same decrease of 39.49%). Mid-2024 gross margin was 32.43% (4.7pcts), of which 2024Q2 was 30.02% (3.41pcts). The mid-term net interest rate for 2024 was 5.71% (same decrease of 1.36pcts), of which the 2024Q2 was 4.76% (same decrease of 2.71 pcts). The year-on-year decline in profitability in 24Q2 was mainly due to an increase in the company's management rate and sales rate. In mid-2024, the sales rate and management rate combined increased year-on-year, increasing by 2.8 pcts and 1.93 pcts respectively.

Restructure the quality of franchise stores and focus on the core market

The company has restructured the quality of franchised stores and has shrunk the city's layout in an orderly manner to withdraw from some markets that have no advantage and poor competitive pattern. By the end of June 2024, the number of company stores reached 4,052, a net decrease of 445 or about 10% compared to the end of 2023; of these, the number of direct-run stores reached 228, a net decrease of 34 compared to the beginning of the year, and 3,824 franchised stores, a net decrease of 411 compared to the beginning of the year. The company identified some stores with poor operating quality through relocation, closure, etc., and the overall quality of the stores has improved significantly. By the end of June 2024, the company's sales network covered 223 cities across the country, 11 fewer than at the beginning of the year, and the layout has shrunk in an orderly manner to focus on core markets.

Profit forecasting

Looking at the company's same-store revenue situation in the short term, there is still a small year-on-year gap; from a medium-term perspective, we are optimistic that the company may gradually get back on track starting in 2024; the number of stores is expected to return to the net year-on-year increase trend in the future. We slightly lowered our profit forecast. We expect EPS for 2024-2026 to be 0.24/0.30/0.36 yuan, respectively. The current stock price corresponds to PE 26/21/18 times, respectively, to maintain a “buy” investment rating.

Risk warning

Downward macroeconomic risks, the pandemic is dragging down consumption, costs falling short of expectations, and the pace of opening stores falls short of expectations, etc.