1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 3.669 billion yuan, down 7.8% year on year; net profit to mother 0.444 billion yuan, up 25.0% year on year; after deducting non-net profit of 0.383 billion yuan, up 19.1% year on year. On a quarterly basis, Q1/Q2 revenue decreased by 7.9%/7.6%, net profit to mother increased by 22.9%/28.3%, respectively, and net profit after deducting non-net profit increased by 21.2%/16.1%, respectively.

Development trends

1. 1H24 revenue declined 7.8% year over year. We think it was mainly affected by store adjustments and increased competition in some regions. By business type and region, the revenue of department stores/supermarkets/appliances in the 1H24 Shenyang region was -10.8%/-22.6%/-48.9% year over year, mainly due to multiple challenges such as reduced passenger flow and increased competition. Some brands have conservative management strategies, and regions with similar business conditions to Shenyang include Henan and Jinzhou; department store/supermarket/appliance revenue in the Mudanjiang region was +3.2%/-21.4%/+22.8% year-on-year, which mainly benefited from the reasonable layout of stores, diversified positioning, and active introduction of leisure and entertainment projects to attract consumer vouchers. There is also a certain As a help, regions with similar business conditions to Mudanjiang include Daqing and Luzhong. 1H24 Overall, out of the company's eight major business regions, the six major regions, including Dalian, Shandong, Mudanjiang, and Daqing, all achieved profit growth. In terms of number of stores, 12 stores were closed in 2Q24, no new stores were opened, and the total number of stores at the end of the period was 95.

2. Increased gross margin, good cost control, and improved profitability. 1H24's gross margin also increased by 1.8 ppt to 42.4%. We believe that the main reason is that the company has taken a number of effective measures to increase gross margin, such as controlling promotional activities. In terms of the cost ratio, the company's sales expenses rate also decreased by 0.8ppt to 11.2%, and the management expenses ratio also decreased by 0.4ppt to 10.1%. Adhering to the net profit orientation, cost control is relatively strict. Furthermore, the financial expenses ratio also increased by 0.1 ppt to 1.8%. Under the combined influence, 1H24's net interest rate to mother increased by 3.2ppt to 12.1%, deducted non-net interest rate by 2.4ppt to 10.4%, and profitability bucked the trend.

3. Actively adjust all business formats at the management level. The company has a leading regional advantage in the Northeast region. The 1H24 business format has made business adjustments to achieve superior performance. The department store gold and jewelry category has increased the area and upgraded sales scenarios to drive rapid growth in the jewelry category while expanding leisure and entertainment experience programs; the electronics industry has built a smart home appliance experience center and added a new alliance model to gain more market share. Furthermore, the company's new model “City Park” has been built and implemented, and we expect it to bring good passenger flow performance.

Profit forecasting and valuation

Maintaining the 24/25 profit forecast of 0.566/0.619 billion yuan, the current stock price corresponds to the 24/25 8.6/7.8 times P/E. Maintaining an outperforming industry rating and target price of 24 yuan, corresponding to 13.3/12.1 times P/E in 24/25, with 55% upside compared to the current stock price.

risks

Competition in the industry intensifies; consumption continues to weaken.