Description of the event

The company released its 2024 mid-year report. During the reporting period, it achieved revenue of 9.36 billion yuan, a year-on-year increase of 3.0%, and achieved net profit of 0.17 billion yuan, a year-on-year decrease of 8.8%; in the second quarter, revenue of 4.17 billion yuan, a year-on-year decrease of 0.2%, and realized net profit to mother of 22.47 million yuan, a year-on-year decrease of 53.8%.

Incident comments

The steady expansion of stores in the new business format and the increase in customer traffic led to a positive increase in revenue, optimized pricing strategies and increased costs to cultivate new stores, putting pressure on the profit stage in the second quarter. 1) At the channel level, the net increase of 48 company stores reached 1,097 during the reporting period, including general supermarkets, community fresh food supermarkets, rural supermarkets, convenience stores, etc., with 6, 4, and 39 net stores closed, mainly in new business formats. Among them, the net opening of 1 Haohuixing discount store reached 8, and the net opening of 51 Yueji snack stores reached 104. 2) In terms of revenue by business category, comprehensive supermarkets, community fresh supermarkets, rural supermarkets and other business formats achieved revenue of 50.0, 2.35, 0.98, and 0.11 billion yuan respectively in the first half of the year, with year-on-year changes of +7.7%, +4.7%, +1.0%, and +51.4%, respectively. Revenue for the single second quarter changed +3.7%, +4.1%, -2.4%, and 41.8% year-on-year, respectively. The growth rate slowed from the first quarter, and the new business format continued its relatively rapid growth trend. Looking at the breakdown, customer traffic in comparable supermarkets increased 13.69% year on year in the first half of the year, while customer unit prices are expected to decline in stages due to a low CPI environment and the company's strategy of optimizing product combinations and enhancing price advantages. Overall, supermarket sales compared to the same store achieved positive growth in the first half of the year. 3) At the gross profit level, gross margins of comprehensive supermarkets, community fresh supermarkets, rural supermarkets and other business formats changed by -0.1, -0.7, -1.5, and +1.8pct year-on-year respectively in the first half of the year, resulting in a year-on-year decline of 0.5 pct to 23.6%, and the gross margin for the single second quarter fell 0.4 pct to 23.0% year on year, mainly due to companies optimizing business methods and product combinations, improving product quality/price advantages, and optimizing the reduction of inefficient commodity inventories. 4) At the cost level, sales/management/financial expenses for the second quarter changed by +906, -71, and +3.58 million yuan, respectively. The main reason for the increase in sales expenses was the increase in labor costs and usage depreciation of newly opened stores since the second half of 2023, and the increase in freight costs during the reporting period. The sales expense ratio increased 0.3 pct year on year, which led to a significant decrease in net profit attributable to the mother in the second quarter.

Adhere to the strategy of improving quality and efficiency, and continuously enhance product strength and supply chain capabilities. During the reporting period, the company promoted the improvement of store quality and efficiency. Through optimization of store area, products, processes, systems, etc., the operating efficiency of stores was improved, and comparable store cost rates were significantly reduced. On the product side, in response to changing trends in consumer demand, category optimization was carried out around product quality and price, product source development was strengthened, procurement reform was promoted, cooperation with suppliers was strengthened, and joint product selection and joint customization were strengthened, and the differentiated advantages of cooked food, pasta, and bakery categories were strengthened in terms of freshness. On the supply chain side, the second phase of the Huaibei Comprehensive Industrial Park project has basically been completed and will be gradually put into operation in the second half of the year, further improving the three-dimensional functional layout of the logistics network.

Investment advice: The company always adheres to the strategy of “regional concentration and complementarity of multiple business formats”. In an environment where consumer demand is weak, the company focuses on improving the quality and efficiency of stores, continuously improving product strength and supply chain capabilities, and at the same time steadily lays out new business formats represented by snack shops and discount stores, which is expected to contribute more. EPS is expected to achieve 0.38, 0.43, and 0.54 yuan in 2024-2026, maintaining a “buy” rating.

Risk warning

1. Residents' income expectations are weak, affecting consumer demand;

2. The development of the new business format fell short of expectations.