Introduction to this report:

The current tea market is fiercely competitive. The company continues to decline and expand, and single store revenue is under pressure. We look forward to product and supply chain optimization.

Key points of investment:

Maintain an increase in holdings rating. Performance fell short of expectations. Single store revenue declined and store opening growth slowed. The adjusted net profit for 2024-2026 was 9.65 (-6.08) /10.44 (-8.84) /11.01 (-11.58) billion yuan (RMB, same below), respectively. The year-on-year growth rates were -23%/+8%/+6%, respectively, and the corresponding PE was 9x/8x, respectively.

Performance summary: 2024H1 revenue 2.396 billion yuan/-10.0%; adjusted net profit 0.395 billion yuan/-34% year over year, adjusted net interest rate 16.5% /y-6 pct; net profit to mother 0.237 billion yuan/year on year -59.7%.

Stores are sinking and expanding, and single store revenue is under pressure. ① Continued store expansion: The number of 2024H1 stores was 8,385, up 20.6% year over year. 826 new stores were opened and 245 were closed in the first half of the year. Closing rates have increased: 2023H1 annualized closing rate was 3%, and 2024H1 annualized closing rate was 6.2%.

The share of stores in fourth-tier cities and below increased to 24%. Overseas business development: As of 2024H1, the company has opened four, two and one store in South Korea, Thailand and Australia, respectively. ② Single store revenue decline: Based on the average number of stores, single store revenue is -26% year-on-year, mainly due to the decline in the average cup volume in a single store. The unit price of a cup is expected to decline by a small single digit. From the perspective of the same store, high-tier same-store decline was even greater; from the perspective of a single store, the average single-store revenue was lowered due to an increase in the share of stores below the fourth tier with lower single-store revenue.

Support for preferential franchise policies was strengthened, and gross margin declined year on year. ① Gross profit ratio: gross profit of 0.76 billion yuan/year over year, gross profit margin of 31.7% /year over year -3.4 pct. Mainly due to changes in consumer habits, the company has increased policy support for franchisees and preferential sales of goods and equipment to franchisees, while also sharing marketing activity expenses with franchisees in the form of material sales subsidies. ② Expense rate for the period: sales expense ratio 4.4% /+2.7pct, increase in marketing activities and sales staff; management expense ratio 9.1% /+2.1pct, affected by the increase in the number of supervisory team members and overseas expansion; R&D expense ratio 0.6% /+0.4pct.

Risk warning: Opening stores fell short of expectations, the same store declined significantly, and consumer demand was weak.