2024H1's core operating profit was 2.799 billion yuan, up 13.0% year-on-year. 2024H1, the company achieved revenue of 21.491 billion yuan/ +13.8%; net profit due to mother of 2.258 billion yuan/ -9.7%, mainly due to changes in exchange profit and loss and cancellation of preferential VAT policies (2024H1 net exchange loss 0.026 billion yuan, 2023H1 revenue 0.193 billion yuan; 2024H1 cancellation, 2023H1 tax plus deduction of 0.159 billion yuan and cancellation in 2024). Excluding the impact of related matters, we achieved core operating profit of 2.799 billion yuan/ +13.0%, which is in line with our expectations.

The turnaround has improved markedly, customer orders adapt to the decline in the consumer environment, and store openings are expected to accelerate in the second half of the year. 2024H1, the company's overall turnover rate was 4.2 times, +0.9 times year on year. Among them, the first, second, third tier and below, Hong Kong, Macao and Taiwan cities had turnover rates of 4.0/4.3/4.1/4.2, respectively, +0.6/0.8/0.9/0.1 times year on year, respectively. Low-tier cities recovered even more strongly. The company's customer unit price fell by 97.4 yuan/ -5% to adapt to the consumer environment and launch more cost-effective products. By the end of the period, the company had a total of 1,343 stores/ -39 stores. The stock was adjusted, and the opening of 11 new stores was still cautious. Considering the high success rate of new store openings (new store turnover rate 4.6 times > existing stores 4.2 times), the company's store expansion rate is expected to accelerate marginally in the second half of the year, and we are still maintaining the single-digit share forecast for net store growth throughout the year.

The profit margin of core operations remained stable, and gross margin reached a new high since listing. 2024H1, the company's net profit margin was 9.48% /-2.47pct, and the core operating profit margin was 13.0%, which remained flat year-on-year. The total cost rate of raw materials, labor and rent costs is 79.8%/-0.5%, and the control effect is good. Among them, raw material costs account for 39.0% /-1.7 pct, and the gross profit ratio of 61.0% hit a new high since launch, which is driven by comprehensive supply chain cost control and product portfolio optimization; labor accounts for 33.3% /+2.7 pct, mainly due to increased turnover rate requiring more personnel reserves and personnel incentives; property rent and depreciation amortization account for 7.5% /-1.5pct, which is a decrease in the absolute value of depreciation and amortization.

“Red Pomegranate” increased the incubation of new brands and distributed mid-term cash dividends. The “Red Pomegranate Plan” was proposed in the company report to encourage the incubation of new brands. Entrepreneurial projects include Yanyou Yakiniku Restaurant, Xiaohi Hot Pot, and “Xiaohi Ai Fried” fried chicken. Incubation of new brands has become a new focus of the company's strategy. In order to match the new strategic focus, the company recently promoted Gou Yiqun (formerly Chairman of Shu Hai) as CEO and introduced Zhang Junjie, founder of Bawang Chaji, as an independent non-executive director. The company announced that it will pay a semi-annual cash dividend, increasing the dividend ratio to 95% (about 93% in 2023). If the dividend ratio is stable throughout the year, the current price dividend rate will reach 7%.

Risk warning: The recovery rate fell short of expectations, falling customer unit prices, failed incubation of new brands. Investment suggestions: Considering 2024 exchange gains and the impact of the cancellation of VAT concessions, we lowered the 2024-2026 net profit to mother to 4.62/5.12/5.62 billion yuan (adjusted direction -9%/-11%/-11%). The corresponding growth rate was 3%/11%/10%, and the dynamic PE was 14/13/12x. The company's operating efficiency has maintained a high level since 2024. Looking forward to the future, there is still potential to increase the turnover rate after store operations. Furthermore, we recommend prudently and optimistically tracking the company's franchise model, new store model trials, and active exploration of secondary brands. In the future, no one aspect of this will rule out the formation of growth points that exceed expectations. The company's payment of cash dividends in mid-2024 will also help enhance the company's investment attractiveness and maintain the company's mid-tier “superior to market” rating.