Key points of investment

Incident: The company released its 2024 three-quarter report. The first three quarters of 2024 achieved revenue of 16.232 billion yuan (+1.19%, same ratio, same below), net profit to mother of 0.63 billion yuan (-12.06%), and net profit of 0.607 billion yuan (-5.94%) after deducting non-return to mother net profit of 0.607 billion yuan (-5.94%). In a single Q3 quarter, revenue of 5.292 billion yuan (+1.18%), net profit attributable to mother was 0.127 billion yuan (-37.32%), and net profit of non-return to mother was 0.125 billion yuan (-19.10%).

Profits are under pressure in the short term due to the rise and base of new stores, and the Torch Project is expected to further increase gross profit margins. The main reasons for the decline in the company's profit in 2024Q3 include 1) the decline in new stores and sub-new stores caused certain losses. 2) 23Q3 resulted in a high base of 37.93 million in non-recurring profits due to the sale of Nanjing related subsidiaries. In the first three quarters of 2024, the company's gross sales margin was 33.87% (+1.32pp), due to the obvious results of the torch project and cost reduction efficiency. It is expected that in the future, with the continuous implementation of the company's various profit plans, such as iteratively upgrading digital intelligent management systems, diversified new product introduction, optimizing new product evaluation processes, restructuring product selection logic, and intelligent shipping and clearance, the overall gross margin is expected to increase further.

The pace of expansion is steady, continuing to focus on advantageous regions, and deepening the sinking market. As of 2024Q3, the number of company stores was 15,591, including 10,300 direct-run stores and 5,291 franchise stores; 2,368 new stores were added in the first three quarters, including 1,264 direct-run stores and 1104 additional franchisees. Among the overall new stores, stores in dominant provinces and key cities accounted for 86%, and stores in prefecture-level cities and below accounted for 77%. In terms of direct management, the company's digital intelligence tools improve the quality of new store openings and shorten the preparation cycle. The average preparation cycle for new stores in Q3 is 40 days, which is 5 days shorter than the same period. On the franchise side, the company focused on the quality of new stores and comprehensively increased the proportion of old stores transferred to the alliance. The franchise business achieved distribution sales of 1.639 billion yuan in the first three quarters of 2024, an increase of 7.5% over the previous year. In terms of alliances, the company helps partner enterprises reduce costs and increase efficiency and enhance business capabilities. In the first three quarters of 2024, the sales scale of the alliance reached 220+ billion yuan, and the number of affiliate stores reached 0.0185 million, achieving a distribution value of 0.28 billion yuan, an increase of 90.8% over the previous year. Among them, the company participated in 76 cooperative enterprises, corresponding to a retail scale of 5.4 billion yuan.

Profit forecast and investment rating: Considering the slowdown in the company's store expansion this year and the prolonged climbing cycle of new stores is putting pressure on profits, we adjusted the company's net profit to mother in 2024-2026 from 1.043/1.346/1.719 billion yuan to 0.825/0.951/1.086 billion yuan. The PE valuation corresponding to the current market value is 16/14/12 times, respectively. Considering the obvious results of the company's torch plan, it is expected that the gross profit margin will continue to increase in 25-26, the performance will be flexible, and the “buy” rating will be maintained.

Risk warning: Risk of increased market competition, risk of store expansion or failure to meet expectations, risk of franchise store development or failure to meet expectations.