Key points of investment

Incident: 2024Q1-3 achieved operating income of 5.015 billion yuan, -10.95% YoY; realized net profit of 0.438 billion yuan, +12.53% YoY; realized net profit of 0.424 billion yuan, +15.73% YoY; 2024Q3 achieved operating income of 1.675 billion yuan, -13.29% YoY; realized net profit attributable to mother 0.143 billion yuan, -3.33% YoY; realized net profit without return to mother 0.143 billion yuan, +2.11% YoY.

The Q3 revenue side was in line with market expectations and remained stable from Q2. We expect the number of stores and single store revenue to stabilize month-on-month in Q2. The number of stores decreased by 981 during the 24H1 period, and single-store revenue is expected to have a double-digit gap year over year. By product, 24Q3 fresh goods/packaging/franchisee management/other main businesses achieved revenue of 12.6/0.16/0.02/0.2 billion yuan, compared to -16.0%/+152.6%/+4.2%/-34.0%. The fresh goods business is still under pressure, and packaging products continue to grow at a high rate.

Falling costs led to an increase in net interest rates. 2024Q3 achieved a gross profit margin of 31.1%, +5.3pct year over year, and +0.5pct month-on-month. The year-on-year improvement was mainly due to a decrease in duck costs. The 2024Q3 sales/management expense ratio was +2.3/-0.1 pct year on year, with a slight decrease from month to month. Considering declining costs and weak external demand, the company has increased its marketing actions since this year to enhance its brand power. 2024Q3 achieved a net profit margin of 8.3%, +1.0pct year over year, and +0.7pct month-on-month.

Profit forecast and investment rating: Considering that the company's current trend in the number of stores is slowing down, we are shifting to boosting the efficiency of single-store stores. Furthermore, it will take some time for external demand to recover, so we lowered our profit forecast. We expect the company's revenue for 2024-2026 to be 6.75/7.04/7.31 billion yuan, -7%/+4%/+4% YoY; net profit to mother of 0.61/0.67/0.74 billion yuan (last forecast was 0.73/0.88/1.01 billion yuan), +77%/+11%/+10% YoY; corresponding PE is 18/17/15X. Maintain a “buy” rating.

Risk warning: Food safety risks, fluctuating raw material prices, and increased industry competition.