Matters:

The company released its 2024 three-quarter report. The first three quarters achieved revenue of 5.02 billion yuan, -10.9% YoY; net profit to mother was 0.44 billion yuan, +12.5% YoY. Q3 achieved revenue of 1.67 billion yuan, -13.3% year over year; net profit to mother 0.14 billion yuan, -3.3% year over year. Slightly lower than previously anticipated.

Commentary:

Q3 revenue fell slightly short of expectations due to an increase in the number of store closures, the continuation of the single-store high-single-digit gap, and increased drag on the supply chain business. The company's 24Q3 fresh goods revenue was -15.99%, and the main business revenue continued to be under pressure. We expect the cumulative closure of stores in the first three quarters to expand further compared to the Q2 net clearance of 981 companies. The Q3 single-store gap improved slightly due to reduced base and optimized store structure quality. In other business aspects, in addition to packaging products benefiting from the expansion of new channels and achieving a high increase of +152.6%, other business pressure continued. Among them, franchisee management was +4.2%, while the supply chain business was +7.5% compared to the overall catering supply chain business. The decline was more pronounced, with the two accounting for revenue from 5.6%/7.3% in H1 to 4.97%/7.55% in Q3. By region, in Q3, with the exception of North China, which continued to increase, there was a certain decline in Northwest/Southwest/Central China/South China/East/Overseas.

Increased spending due to weak demand has partially offset cost improvement dividends, and the recovery of net interest rates is still slow. The company's Q3 net profit was -3.3% year-on-year, with a gross profit margin of 31.1%, +5.3pct year over year. As the 23Q3 cost dividend was partially reflected, the improvement in gross margin decreased compared to Q2. At the same time, the sales expense ratio was 9.7%, +2.4pcts year over year, mainly related to the company's increased spending efforts in the context of weak demand. Other expenses remained stable. The management expense rate/R&D expense ratio and financial expense ratio were -0.1/+0.1/+0.1pcts, and the company finally achieved a net profit margin of 8.5% + 0.9pcts, +0.5pcts month-on-month.

Continuing to optimize the store structure, the quality of operations has improved, and we expect the same stores to improve the inflection point and provide catalysts. Considering the weak external environment, it is expected that the pressure on the company's Q4 revenue will continue, and the pressure on the profit side will increase under pressure on investment and investment profits and losses. However, looking forward to the future, the company's current development is similar to the situation where Haidilao started closing in '22. Being brave in closing stores is a key step in speeding up clearance, optimizing business quality, and moving towards reversal. Currently, the company is more proactive in boosting the same-store performance of existing stores through active cost investment, flexible and youthful marketing activities, etc., which not only protects the profits and viability of franchisees, but also strengthens its brand power among consumers. In the future, once the number of stores is gradually optimized, once the number of stores is gradually optimized, once the company stabilizes the balance between the number of stores and the same store's performance, if there is an improvement on the demand side, then the same store improves acceleration and price repair recovery Even the ecological contributions of braised foods such as Liao Kee are expected to gradually contribute to a flexible source.

Investment advice: optimize stores, actively seek change, strategic allocation at the bottom, and maintain a “recommended” rating. In the short term, the company's revenue continues to be under pressure, but the company resolutely initiated closing and optimization. This is a critical step to get out of the low cycle. With the gradual activation of system vitality and the gradual introduction of countercyclical policies, the current period of operation has passed its dark point of view, and then it is possible to first allocate from a value perspective, and then keep an eye on catalytic developments such as same-store improvements, profit recovery, and ecological contributions. Based on the three-quarter report, we adjusted the 24-26 EPS forecast to 0.87/1.09/1.19 yuan (the original forecast was 0.98/1.17/1.29 yuan), corresponding PE to 21/16/15 times. Referring to the historical average valuation center, we gave a 25-year 18 times valuation, corresponding to a target price of 19.6 yuan, and maintained the “recommended” rating.

Risk warning: increased cost investment; weak demand; slowdown in store opening; increased competition; rising costs, etc.