Matters:

Business review: An old private enterprise that continues to break through, has experienced performance from peak to bottom under changes in industry demand and investment pace in the past two years. The company is a leading regional catering private enterprise for large-scale banquets and daily banquets, and the store has been iteratively upgraded several times during critical periods. After 2013, it resisted the “three capital limit” sluggish cycle, and since 2014, it has been upgraded to a one-stop banquet service, which has stabilized and maintained good operating cash flow; since 2020, the focus has been on investing in the Fumao model and capital expenditure has expanded. Performance reached a record high with the release of supplementary wedding receptions in 2023; in 2024, due to weakening agricultural preferences, the superposition company was in a rapid expansion cycle. Revenue in the first three quarters was +11%, net profit to mother was -59%, and short-term operations and cash flow were under pressure.

Latest tracking: According to preliminary tracking, demand for wedding receptions is expected to rebound in 2025, and the company is also expected to balance the pace of investment more balanced. Currently, private rooms and banquets each account for nearly half of revenue, and banquets contribute even more to profits. The number of marriages in Hefei increased 7.3% year-on-year in the first half of this year. Combined with the “double spring” agricultural effect next year, combined with the 6-12 month wedding reservation cycle, it is not ruled out that demand will pick up. According to the company's report, other accounts payable at the end of the third quarter (mainly meal deposit) was 0.23 billion yuan/ +6.9%, and the growth rate was positive compared to the second quarter. Furthermore, if follow-up policies continue to develop, it is worth looking forward to an improvement in demand for family dinners, business banquets, etc. The company's public investor exchange stated that it will properly control the pace of investment. We expect that the decline in capital expenditure next year will provide a foundation for the release of profits in existing stores.

Future outlook: If demand picks up, the company's store expansion is expected to gradually enter a harvest period. 1. Stock stores operated relatively smoothly in 2019. In line with the company's announcement, even during the industry downturn this year, the stock store revenue in the first three quarters was still close to 2019, while the company made efforts to control costs and maintain profitability.

2. New stores are the core of profit flexibility. ① In 2020-2024, the company opened about 19 new traditional stores with 0.16 million square meters to accelerate the expansion of offsite share.

The industry base has fluctuated greatly in the past two years, and the return of demand to relatively normal next year is expected to provide a good observation window for offsite verification of stores. If we simply calculate the 2019 flat rate, the corresponding maturity period profit is expected to reach about 0.12 billion yuan. ② Fumao Hotel's development idea is to first consolidate the basic infrastructure of Hefei, then lay out key cities in the Yangtze River Delta, and launch asset-light franchise expansion in due course. By the end of 2024, the company's Fumao Hotels are expected to be in operation, including 8 in Anhui and the first in Shanghai and Hangzhou. After opening, the total area is estimated to exceed 0.4 million square meters. It is expected to contribute about 0.28 billion yuan in profit during the maturity period based on the efficiency of the flagship store Binhu Fumao and based on differences in profitability between the three brands. This model has high investment and operating barriers and excellent competitiveness. Refer to the similar Platinum Hanjue Hotel, which has 11 stores in the Yangtze River Delta, with a single store area of 0.07-0.2 million square meters. The total turnover of 9 stores exceeded 2 billion yuan in 2018. 3. Financial expenses: The company's financial expenses increased to 48 million in the first three quarters of this year. Subsequent financial expense growth is expected to be relatively manageable under a more balanced pace of expansion.

Investment advice: The company is a leading private enterprise in the large catering area. It is actively iterating the store business model and expanding outward. Changes in industry demand and investment pace in the past two years have increased performance fluctuations. Looking ahead, the neutral assumption is that the business environment will improve. The net profit forecast for new stores will rise above this year's benchmark, maintaining the 2024-2026 net profit forecast of 0.138/0.28/0.384 billion yuan, and the dynamic PE is 48/23/17x; under optimistic conditions, if the business environment improves significantly, the new model and remote stores verify smoothly, and the pace of profit release for new stores is close to the average level of existing stores. It is estimated that the net profit for 2025-2026 will reach 0.344/0.481 billion yuan, and the current stock price dynamic PE is 19/ 14x As the target of the growth of A-share scarce restaurants, the company's average valuation for the year since its listing was in the 20-35x range. Currently, the valuation is relatively low. More active consumer promotion and childbearing friendly policies are expected to support sentiment and maintain a “superior to the market” rating.

Risk warning: The consumption environment falls short of expectations, the rise of new stores falls short of expectations, and financial cost control falls short of expectations.