Incident: On August 23, the company announced its 2024 semi-annual report, achieving operating income of 37.78 billion yuan/-10.11%, net profit of 0.275 billion yuan/YoY -26.34%, net profit of 0.03 billion yuan/YoY -69.9% after deducting non-return net profit, 2024H1 operating cash flow reached 2.94 billion yuan/YoY +13.63%; 2024Q2 achieved operating income of 16.114 billion yuan/YoY- 11.6%, net profit attributable to mother -0.46 billion yuan/-0.33 billion yuan for the same period last year, net profit not attributable to mother -0.57 billion yuan/-0.52 billion yuan for the same period last year.

Actively promote product+channel optimization and improve overall operational efficiency. The company achieved overall revenue of 37.78 billion yuan per year in 2024H1, of which 1) Offline: In the first half of 2024, the company actively promoted the optimization of the national store network, added/closed 5/62 stores, 943 existing stores by the end of the period, and had signed 86 unopened stores. 2) Online: Achieved revenue of 7.84 billion yuan, which is basically the same as the same period last year, accounting for 20.8% of revenue. By improving product competitiveness and warehouse-side contract fulfillment efficiency, the online business significantly reduced losses compared to last year. Yonghui's self-operated platform's home delivery business has covered 883 stores, achieving sales of 4.22 billion yuan/year on year +4%. In terms of compliance management, the 2024H1 compliance punctuality rate was 93.1%. In terms of channel operation, the company has strengthened cooperation with third-party platforms, developed new Douyin Kuaishou channels, ranked TOP1 among channel merchants many times in a row, and created fresh products such as durian and Yonghui prawns from Yonghui's local group. 3) Supply chain: 2024H1 continues to optimize the product structure while further improving the efficiency of product introduction. A total of 20276/22480 units were added/eliminated, and the new product introduction/elimination rate reached 22.5%/24.9%. During the reporting period, the exposure rate and transaction rate of our own brands were strengthened, and our own brands achieved sales of 1.28 billion yuan, accounting for 3.4%.

The market environment is severe, and profitability is under pressure. 1) On the margin side, the company's 2024Q2 gross margin was -0.97 pct to 19.86% year on year; 2) On the cost side, the overall cost ratio of the 2024Q2 company was +0.4 pct to 24.6% year over year, and the sales/management/ R&D/finance expenses ratio was -0.4/+0.7/-0.1/+0.2 pct to 19.5%/2.8%/0.4%/2.0% year over year, respectively. Among them, sales/R&D rates were optimized year-on-year due to factors such as cost reduction and efficiency and personnel optimization. 3) 2024Q2 asset disposal income reached 0.167 billion yuan/year on year +109%, investment income 0.13 billion yuan/year on year +32%. Overall, net profit attributable to mother was -0.46 billion yuan/-0.33 billion yuan for the same period last year.

Fat Donglai helps and self-regulation go hand in hand, and the adjustment plan is progressing steadily. During the reporting period, the company actively learned the Fat Donglai concept to revise existing stores; 1) Remediating the stores had remarkable results: Currently, the company has restructured the Zhengzhou Xinwan Plaza Store and the Zhengzhou Hanhai Haishang Store, using the three dimensions of products, scenarios, and services as entry points. While continuously strengthening the fresh supply chain, the company continues to cultivate product quality and service. The two stores opened on June 19 and August 7, respectively. Among them, ① the Xinwan Plaza store sold 1.87 million on July, 13.9 times the daily sales volume before the adjustment, reaching 12,926 people; ② after the opening of the Hanhai Haishang store, daily sales reached 1.08 million as of August 22, which was 8.2 times the daily sales volume before the change, and the customer flow increased nearly 10 times. 2) The reform plan is progressing steadily: While Fat Dong helps, the company promotes an independent reform route and forms a national store team to study the entire reform process. At present, the first self-remodeled store, the Xi'an China Trade Plaza store, has begun restructuring and opened at the end of August. The average daily sales volume reached 1.6 million yuan two days before opening, and the average daily customer flow of the store exceeded 0.014 million people.

Investment advice: The company is an offline supermarket leader with a strong and fresh supply chain. Beginning in the second half of 2020, new channels such as community group buying were introduced, and the company's operation was challenged to some extent. After entering 202H1, the company's competitive environment and its own business conditions have improved. Currently, along with the recovery of the macro environment and the recovery of offline passenger flow, the company's profitability has improved. In 2023, benefiting from improved operating efficiency, increased fair value of financial assets, and reduced asset impairment losses, the margin of loss was further narrowed. Referring to the current severe market environment, 2024H1's profitability is under pressure. We adjusted our 2024-2026 operating income to 73.9/77.6/81.5 billion yuan, net profit to mother to -0.33/-0.06/0.39 billion yuan, and EPS was -0.04/-0.01/0.04 yuan/share, respectively, maintaining a permanent increase rating.

Risk warning: Labor and rent costs have increased dramatically; store expansion falls short of expectations; industry competition has clearly intensified; and the results of the restructuring have fallen short of expectations.