The company announced its 2024 three-quarter report, and the results were in line with expectations: 1) 24Q1-Q3's revenue was 9.047 billion yuan, down 2.22% year on year, and net profit to mother was 0.118 billion yuan, down 47.32% year on year. After deducting non-net profit of 0.062 billion yuan, a year-on-year decrease of 48.66%. 2) The main revenue of 24Q3 was 2.928 billion yuan, down 3.05% year on year, and net profit to mother was -0.036 billion yuan, down 457.56% year on year. After deducting non-net profit of 0.054 billion yuan, a year-on-year decrease of 210.18%.

The offline business format continues to transform, and supermarket store upgrades have achieved high results. According to the company announcement and the company's public account, the revenue of 2024Q3 comparable stores/newly opened stores was 2.827/0.065 billion, -2.46%/+184.4% year-on-year. By business format, the company's multiple business format upgrades led to an 8.8% year-on-year increase in passenger traffic. The Buy100 business increased the introduction of new trend products, rationally planned store space, and increased occupancy rates. The rental rates of shopping malls and department stores reached 93.26%/92.73%, respectively. The supermarket business format increased product and organizational optimization and improved management levels. The performance ratio was 1.6% compared to the same period. SP @CE3 .0's image has been completely upgraded, focusing on improving product strength. After the reform, supermarkets replaced nearly 4,000 SKU products, that is, 4,500 SKUs were removed and 3,900 new SKUs were added. Of these, 2,500 SKUs were added for single products and 1,600 SKUs were upgraded. The adjustment results were excellent. The first SP @CE3 .0 in the country was launched on September 6 at Tianhong Shopping Center in Bao'an, Shenzhen. The store's performance exceeded 1 million yuan on the day it opened. Sales increased 196% year on year and 121% month on month, laying the foundation for a comprehensive upgrade of the company's supermarket.

Gross margin is under pressure, and cost control is excellent. According to the company announcement, 24Q1-Q3 achieved a gross profit margin of 36.50%, a year-on-year decrease of 0.99 pct, and achieved a gross profit margin of 35.40% in 24Q3, a year-on-year decrease of 1.16 pcts. Among them, the total profit of the buy 100 business was under pressure, and the profit of shopping malls and department stores was -31.75/ -37.86% year-on-year, respectively. The supermarket business is in a period of adjustment, but it is already beginning to bear fruit. The total profit of comparable stores changed -3.32% year over year, which is significantly narrower than the 24H1 profit decline (-17%). The 24Q3 company's expense control measures continued to advance, achieving a period cost ratio of 36.42%, -2.22pct year on year. Among them, the sales expense rate/management expense rate/financial expense ratio reached 32.24%/3.09%/0.36%, and -1.05/-0.15/-1.06 pct year on year.

Accelerate the development of digital industrialization and release a large-scale AI model for the retail vertical industry. According to the company's official website and company announcement, in June, Tianhong Co., Ltd. signed a strategic cooperation with its technology subsidiary Smart Mathematics and Zhejiang University School of Management to jointly establish a “Smart Retail Joint Laboratory” to explore new integrated business models in depth. Currently, Tianhong's digital membership has reached 50 million. Q3 is further promoting AI exploration, independently developing a large Larry AI model, and accelerating the construction of a new AI+ retail ecosystem. The Lark AI model uses Tianhong's own business data+over one million levels of external public data+selected industry data to create a high-quality data training set, deeply understand retail business scenarios, accurately capture changes in market demand, achieve changes in customer service models, and enhance the shopping experience.

Maintain a “buy” rating. Tianhong continues to strengthen digital intelligence construction and promote the transformation and upgrading of the three major business formats. Although the retail industry faces problems such as insufficient consumption momentum and market weakness, we are still optimistic that the company's stores can improve their operating capacity by relying on continuous optimization and transformation and the digitalization of the retail industry. Considering the current competitive pressure in the industry, we lowered our profit forecast. We expect the company's net profit to be 0.173/0.193/0.212 billion yuan for 24-26 (the original value was 0.209/0.235/0.252 billion yuan), corresponding to PE of 34/31/28 times, maintaining the “buy” rating.

Risk warning: Consumption recovery falls short of expectations, digital construction falls short of expectations, and store adjustments fall short of expectations.