Key points of investment:

The company released its 2024 semi-annual report, and the results were in line with expectations. According to the company's announcement, 24H1 achieved operating income of 8.98 billion yuan, -12% over the same period, mainly due to a decrease in passenger traffic at department stores and the active control of operating risks in the auto trade business, which reduced the scale of the special vehicle supply business. 24H1 net profit attributable to mother was 0.712 billion yuan, -21% year over year, after deducting non-attributable net profit of 0.705 billion yuan, -13% year over year.

24Q2 achieved operating income of 4.13 billion yuan, -19% YoY, net profit to mother 0.277 billion yuan, -29% YoY, net profit not attributable to mother 0.259 billion yuan, or -26% YoY.

Ma Xia's investment income and Dengkang Dental's irregular profit and loss disturbances affected 24H1's net profit performance. According to the company's announcement, 23H1 immediately increased net consumer profit by 137% year-on-year, driving the company's investment income up 137% to 0.42 billion yuan. 24H1's immediate net consumer profit decreased by 20.82% year on year, reducing the company's investment income by 20.52% year on year to 0.334 billion yuan. Moreover, the fair value of Dengkang Dental shares held by the company increased markedly, further raising the base. The fall in stock prices this year reduced non-recurring profit and loss by 93% year-on-year.

Increase promotion, improve product strength, and take more measures to boost sales. According to the company's announcement, the company focused on laying out the channel network in Chongqing and Sichuan to consolidate the radiation capacity of the Chengdu and Chongqing economic circle. As of 24H1, there were 274 operating outlets, a decrease of 7 compared to the end of 23. The company has formed a relatively complete network layout in Chongqing and Sichuan. The number of department store/supermarket/electrical/auto trade network points was 50/149/41/34 respectively, a net change of 0/-3/0/ -4 compared to the end of '23. 24H1 launched 50 promotions. The department store festival and the home appliance festival were two-wheel drive, which boosted sales to a total of 6.58 billion yuan. The results of the first 611 Department Store Festival were remarkable. Passenger traffic increased 12% year over year, driving sales of 1.05 billion yuan. Optimize the supply chain, supermarket traceability and direct procurement, department stores establish an Ole supply chain, and enhance the core competitiveness of the retail industry. Develop differentiated products, improve the diversity of product portfolios, and develop in-depth cooperation with strategic brands. Department stores and electrical appliances achieved strategic brand sales of 1.648 billion yuan and 867 million yuan respectively.

Q2 Gross margin improved year-on-year, and cost reduction and efficiency kept rates stable. According to the company announcement, 24H1's gross margin was 26.65%, +0.74pct year-on-year. 24Q2 gross margin was 24.84%, +2.61 pct year over year. The 24H1 company's cost rate for the period was 19.05%, +0.18pct year on year, of which the sales/management rate was 13.95%/4.70%, +0.94/-0.28pct year on year.

The 24Q2 sales/management rate was 14.82%/5.24%, +2.05/+0.36pct year-on-year. 24H1 actively adopted measures to reduce costs and increase efficiency. The store rent was reduced by 36.6 million yuan, and the total labor cost and inventory were reduced by 0.1 billion yuan over the same period last year, reducing expenses.

Exploring the new “fresh+discount” model, the newly opened supermarket performed brilliantly. According to the company's official account and company announcements, the company's New Century Supermarket launched a transformation plan to open four new “fresh+discount” supermarkets by the end of August. The company focuses on optimizing and restructuring the supply chain. On the basis of rapid procurement and operation from the previous base, the company is increasing procurement efforts for high-quality fresh products, and at the same time launching various types of discounted products, deepening cooperation with suppliers, and ensuring the stability of product supply at the source. The new California store opened in June with sales of 2.19 million yuan in 6 days, and the average number of daily transactions reached 6,200. The California store was profitable in the month it opened. Untaxed sales increased 37% year-on-year in the following month, and gross profit increased by more than 38%. By the end of June, the number of transactions at the Baihe Road store had an average year-on-year increase of 110%. Untaxed sales and net gross profit increased by 205% and 97%, respectively.

Adjust profit forecasts to maintain a “buy” rating. The company has a complete store layout and extensive user stickiness in the Sichuan and Chongqing regions. Over the past 24 years, we have actively promoted the transformation and upgrading of retail supermarkets, built multi-scene stores, and promoted the integration of various business formats such as department stores, supermarkets, and electrical appliances. Looking forward to H2, the company's performance growth rate is expected to recover as the impact of short-term base disturbances weakens. Considering the impact of H1 Ma Shao and Dengkang Dental, we lowered net profit to mother for 24-25 to 1.366/1.492/1.611 billion yuan (original value was 1.436/1.565/1.735 billion yuan), corresponding to PE 6/5/5 times, maintaining the “buy” rating.

Risk warning: Consumer demand falls short of expectations, the performance of the new business format falls short of expectations, and traffic falls short of expectations.