1-3Q24 results are in line with our expectations

The company announced its results for the first three quarters of 2024: operating income of 5.328 billion yuan, up 3.9% year on year; net profit to mother of 0.209 billion yuan, down 20.4% year on year; after deducting non-net profit of 0.162 billion yuan, up 22.4% year on year, in line with our expectations, achieving both an increase in revenue and net profit. On a quarterly basis, Q1/Q2/Q3 revenue increased 1.7%/2.4%/8.4%, respectively; net profit to mother increased by +8.9%/-44.9%/+58.4% year over year (Q2 net profit declined mainly due to receiving 0.107 billion yuan in demolition compensation and resettlement payments in the same period last year, but there was no such payment this year); net profit also increased 17.2%/31.6%/7.9%, respectively, continuing the growth trend.

Development trends

1. Revenue for the first three quarters increased by 3.9% year on year, with revenue in Q3 increasing by 8.4% year on year. By business type: 1) Department stores (including home appliances): The department store industry continues to increase the “first store economy”, introducing 209 new brands, and the brand renewal rate reaching 8%. We expect a slight year-on-year increase in revenue for the first three quarters; 2) The supermarket industry:

Considering continued competition in the industry, we expect revenue to be under some pressure in the first three quarters; 3) Agricultural products trading market:

The company leverages its channel advantages to help revitalize the countryside. We expect the business's revenue to grow relatively rapidly in the first three quarters. In terms of network layout, Hejiakang added 81 self-operated outlets and 685 distribution outlets; by the end of the period, the company had a total of 313 chain stores, supermarkets, agricultural stores, etc.

2. Cost reduction and efficiency have led to an increase in the profitability of the main business. The company's gross margin fell by 0.6ppt to 27.0% in 1-3Q24. We believe that due mainly to increased competition, the gross margins of department stores and supermarkets were under pressure. In terms of period expenses, the 1-3Q24 sales expense rate/ management expense rate/ financial expense ratio decreased by 0.3 ppt/0.9ppt/0.2ppt to 6.1%/13.7%/0.5%, respectively, continuing to reduce costs and increase efficiency. Under the combined impact, the net interest rate due to 1-3Q24 decreased by 1.2ppt to 3.9%, deducted from non-net interest, increased by 0.4ppt to 3.0%, and the profitability of the main business increased.

3. Strengthen online channel construction and expand new space for cross-border trade. According to the company's announcement, on the online side, the company officially launched the “i100” mini-program this year, with more than 0.64 million registered members, covering more than 20 provinces, cultivating online sales of 5 10 million brands and 25 million brands. 1-3Q24 online sales also increased 22.5% to 0.743 billion yuan. Overseas, since the establishment of the cross-border division, the company has directly harvested nearly 2,200 tons of Thai Golden Pillow durians, Chilean cherries, etc. across borders, and has achieved exports of children's clothing, snacks, and confectionery products. Looking ahead, we believe that online and cross-border businesses are expected to further bring new volume to the company.

Profit forecasting and valuation

Maintain the 2024 profit forecast of 0.253 billion yuan, and introduce the 2025 profit forecast of 0.281 billion yuan. The current stock price corresponds to 16.2/14.6 times P/E for 24/25. Maintaining an outperforming industry rating and maintaining a target price of 6.15 yuan, corresponding to 19.0/17.1 times P/E in 24/25, there is 17% room for growth compared to the current stock price.

risks

Competition in the industry intensified, and the transformation fell short of expectations.