2024Q3 achieved revenue of 4.523 billion yuan, a year-on-year increase of 19.3%; realized net profit to mother of 0.642 billion yuan, an increase of 4.8%; and achieved adjusted net profit of 0.686 billion yuan, an increase of 6.9% year-on-year. In the first three quarters of 2024, the company achieved revenue of 12.281 billion yuan, a year-on-year increase of 22.8%; achieved net profit to mother of 1.812 billion yuan, a year-on-year increase of 12.0%; achieved adjusted net profit of 1.928 billion yuan, an increase of 13.7% year-on-year. After excluding net exchange losses and revenue effects, adjusted net profit was 1.95 billion yuan, an increase of 18.3% year on year.

Store expansion continues at a high rate, and a total net increase of 900-1100 stores is expected throughout the year. As of 2024Q3, the company had a total of 7,186 stores, a net increase of 1,071 stores over the previous year; a net increase of 773 stores over the end of 2023; 234 TOP TOY brand stores, a net increase of 112 over the previous year, and a net increase of 86 over the end of 2023. Among them, the number of direct-run stores/partner stores was 29/205, a net increase of 20/92, respectively, and a net increase of 15/71 from the end of 2023, respectively.

By region, 1) Mainland China: 4250 stores, a net increase of 448 over the end of 2023; of these, the number of direct-run stores/partner stores was 29/4221, a net increase of 9/439, and a net increase of 3/321 from the end of 2023; 2) Overseas regions: 2,936 stores, a net increase of 623 over the previous year, with a net increase of 449 from the end of 2023; of these, Asia (excluding China) /North America/Latin America/Europe/other regions had separate stores 1572/294/598/260/212, a year-on-year net increase of 308/154/84/42/35, respectively, and a net increase of 239/122/46/29/13 from the end of 2023, respectively. According to the company's announcement, the net number of stores is expected to increase by 900-1100 in 2024, including 350-450 in China and 650-700 in overseas regions. The target for the whole year is expected to be achieved.

Overseas direct management led to an increase in overall gross margin. The overseas business achieved revenue of 4.54 billion yuan in the first three quarters of 2024, an increase of 42 percent over the previous year. Overseas revenue accounted for 37% of the company's total revenue in the first three quarters, and overseas direct store revenue accounted for 20% of the company's total revenue in the first three quarters. The increase in the number of overseas direct stores provided strong support for gross margin. The company's overall gross margin for the first three quarters of 2024 was 44.1%, up 3.7 pct year on year. The adjusted net profit margin was 15.7%, down 1.3 pct year on year.

In terms of expense ratios, the company's sales/management expense ratios for the first three quarters of 2024 were 20.5%/5.3%, respectively, +4.9pct/+0.4pct. The sharp increase in sales expense ratios was mainly due to the expansion of direct stores at home and abroad, and related rent expenses, depreciation and amortization expenses, wages, etc. increased accordingly.

At the right time for the millet economy, IP strategy+two-dimensional efforts stabilized the company's same-store performance. Over the past few years, the company has cooperated with more than 150 IPs around the world. Of the top ten IP licensors in the world, 6 have cooperated with the company. In terms of IP reserves, the company has reached an authorized cooperation with leading riman game and two-dimensional popularity IP to set up an internal two-dimensional IP management and R&D team. In the future, it will launch milk-like peripheral products developed by famous creators through second-innovation, contract writing, etc., to create differentiated creative products. IP strategy+two-dimensional efforts may lead to continuous improvement in product strength and increase in store customer unit prices, thereby stabilizing the company's same-store performance.

The mid-term dividend+repurchase plan strengthens shareholder returns. In August 2024, the company announced a cash dividend of $0.62 billion, accounting for a total of about 50% of the 2024H1 adjusted net profit; it also announced a new round of share repurchase plans to repurchase up to HK$2 billion of shares within 12 months starting August 30. Dividends+repurchases demonstrate the company's confidence in long-term development.

Profit forecast and rating: We expect revenue for 2024-2026 to be 17.18 billion yuan, 20.763 billion yuan, and 23.835 billion yuan respectively, and adjusted net profit to mother is 2.828 billion yuan, 3.531 billion yuan, and 4.22 billion yuan respectively. We selected Bubble Mart, Five Below, and Dollar Tree as comparable companies. The company's PE was lower than the average of comparable companies, and covered for the first time Give it an “gain” rating.

Risk warning. Store expansion falls short of expectations; overseas market operations fall short of expectations; brand upgrades fall short of expectations.