Incident: On October 17, Dashi Co., Ltd. announced that Domino's Pizza LLC, the company's main shareholder, sold 10 million shares through OTC bulk transactions, accounting for 7.66% of the total share capital. Stock buyers included institutional investors. Domino's Pizza LLC's shareholding will drop to 6.21% from 13.87% prior to the sale, and promised that its remaining shares will be banned for 90 days from the share settlement date (expected October 21, 2024).

Summary of changes in Domino's Pizza LLC shares: Domino's Pizza LLC is a wholly-owned subsidiary of the Domino's brand. It invested 40 million US dollars in Dashi in May 2020 and January 2021, and invested a total of 50 million US dollars with an independent third party company in December 2021 to provide the company with growth capital. As of 24H1, Domino's Pizza LLC was the company's second largest shareholder. Before the sale of shares, Domino's Pizza LLC held about 18.1 million shares, accounting for 13.87% of the total share capital. In view of the company's profits and significant growth, the brand sold part of the shares and retained about 8.1 million shares, accounting for about 6.21% of the total share capital, and promised that the remaining shares will be locked in for 90 days after the transaction is completed.

This shareholder structure update will not affect the company's fundamental operations, and will provide liquidity for the company's shares and expand the shareholder base. Dase signed a long-term franchise agreement with Domino's brand subsidiary on June 1, 2017. It has the exclusive right to develop and operate Domino's Pizza stores in mainland China, Hong Kong and Macau, China, and the right to subcontract the development and operation of Domino's Pizza stores, as well as a license to use and sub-license the Domino's system and related trademarks in store operations. The sale of shares has no impact on the franchise agreement and cooperative relationship signed between the company and the brand, and is expected to provide liquidity for the company's shares and expand the shareholder base. At the same time, the company's board of directors anticipates that the sale of shares will not adversely affect the company's business operations and financial situation.

Fundamental operating performance was strong, and the same store continued to grow positively in 3Q24, with plans to exceed 1,000 stores in November. The 24H1 company's net interest rate/adjusted net interest rate reached 0.5%/2.5% respectively, and the 24H1 store operating profit margin was further increased to 14.5%. Currently, the store opening plan is progressing steadily, and the number of stores has expanded to 978 stores by 24Q3, with plans to reach the milestone of 1,000 in November. On the same store side, as of the third quarter, the company had achieved 29 consecutive quarters of positive same-store growth, and the number of members further increased to 21.7 million.

Investment advice: The company has reached a profit inflection point. The UE model continues to be optimized. Currently, it is in the “growth period” of opening a store, and there are still many empty markets to be penetrated. We expect the company's adjusted net profit for FY2024-2026 (excluding directors' remuneration, changes in stock value-added rights and restricted share units, and changes in fair value of financial liabilities) to be $0.11/0.16/0.269 billion yuan, corresponding to the adjusted EPS of $0.84/1.22/2.06, respectively, and the PE corresponding to the closing price on October 17 is 75/52/31 times, respectively. Maintain a “Recommended” rating.

Risk warning: 1) Industry competition increases risk; 2) risk of consumer market performance falling short of expectations; 3) food safety risk; 4) risk of falling short of expectations in store expansion; 5) sharp rise in raw material costs affects profit risk.