Matters:

The company released its 2024 semi-annual report, and 24H1 achieved revenue of 3.34 billion yuan, -9.73% year-on-year; net profit to mother was 0.3 billion yuan, +22.2% year-on-year. Single Q2 achieved revenue of 1.64 billion yuan, -12.35% YoY; net profit to mother 0.13 billion yuan, +25.8% YoY.

The company announced the 2024 mid-term profit distribution plan, with a cash dividend of 0.30 yuan (tax included) per share. Comments:

The number of store closures increased, and the single-store gap narrowed. Q2 revenue was -12.4% year-on-year, in line with expectations. The company's 24H1 fresh goods product revenue was -12.0% year over year. In terms of store opening, the company continued to promote store optimization activities. In the first half of the year, 981 stores were closed, and the number of stores as of 24H1 was 14,969, down 7.4% from 23H1. On the single-store side, it is estimated that single-store revenue declined by about 2% compared to 23H1. Looking at 24Q2 alone, the company's revenue for fresh goods products was -15.2%, mainly due to a further increase in the number of store closures after the Spring Festival. The single-store gap narrowed month-on-month in Q1 due to intensive cultivation and a decrease in the share of low-tier cities. In other businesses, Q2 franchisee management revenue was -27.1% year-on-year, and packaging products were +111.12% year over year. At the same time, the company disclosed for the first time the revenue from the collection business and supply chain logistics, which accounted for 5.6%/7.3% of 24H1 revenue, respectively. By region, with the exception of positive growth in North China, the company experienced a certain decline in Q2 in Northwest/Southwest/Central China/South China/East China/Overseas.

Gross margin was greatly optimized at low costs. The pace of investment and credit impairment were slightly disrupted, and Q2 profit improved year over year. The 24Q2 company's gross profit margin was 30.5%, +8.2 pcts year on year, mainly benefiting from a sharp drop in raw material prices.

In terms of expenses, the sales expenses rate for a single Q2 was 10.0%, +2.6 pcts year on year. The main reason was that publicity activities were delayed and the pace was relatively concentrated. The overall cost investment was still on the normal planning schedule. The management fee ratio was +0.2 pcts year over year. Stock payment fees were drastically reduced this year, but due to the reduction in the denominator base, there was no significant improvement on the reporting side. The R&D/finance cost ratio was +0.1/+0.2 pcts year over year, all fluctuating within a reasonable range. Finally, considering the impact of credit impairment fluctuations, the company's net profit margin for Q2 reached 8.0%, +2.4 pcts year on year, and 7.6% net interest rate after deducting non-return net interest rate, +2.7 pcts year on year.

Face up to current problems, actively seek change, and focus on the critical inflection point where the company's subsequent sales volume correction and single store stabilization. Facing current business problems, the company focused on seeking change from three aspects. One was to shift from horse-racing to intensive cultivation, with increasing single-store revenue and safeguarding the survival of franchisees as the top priority, focusing on evaluating the return on investment cycle of stores, and focusing on cleaning up some fourth- and fifth-tier inefficient stores in the first half of the year; second, it strives to adapt to new changes in the industry through a new brand image and marketing strategy, and recently released a new brand symbol, slogan, IP image and first spokesperson to expand the brand awareness of young consumers and build a digital operation system. Currently, the company accounts for nearly 50% of online production; Able to lay out and advance Market-based transformation focuses on improving the utilization rate of production capacity, making it clear that large fixed assets and equity investments will not be increased as much as possible. On a full-year perspective, considering the continuation of store optimization, revenue is expected to remain under some pressure. Profits are expected to contribute to elasticity driven by gross margin. After stabilizing franchisee expectations, along with the optimization of marketing actions, the operating quality of the company's remaining stores is expected to improve. The future focus will be on critical points such as the correction of the company's sales volume and the stabilization of single store revenue.

Investment advice: Face up to business issues, actively seek change, and maintain a “recommended” rating. In the short term, the company's revenue is still under pressure, and the profit side is gradually being repaired and improved. Next, the company continues to make efforts to adjust, focusing on the critical inflection point where overall sales and single store revenue will change from negative to positive. When the reporting base is reduced and the quality of operation is improved, the company is expected to return to steady growth. Coupled with reduced capital expenditure and increased dividend rates, the corporate value will be further reflected. Based on the interim report, we adjusted the 24-26 EPS forecast to 0.98/1.17/1.29 yuan (the original forecast was 1.33/1.52/1.79 yuan), the corresponding PE was 13/11/10 times, and the 24-year PE was 16 times, corresponding to the target price of 15.7 yuan, maintaining the “recommended” rating.

Risk warning: increased cost investment; weak demand; slowdown in store opening; increased competition; rising costs, etc.