The company is the exclusive franchisee of Domino's Pizza in China, and its performance turned into profit due to scale effects. In 2017, the company completed the integration of management rights in Greater China, introduced Wang Yi as CEO, actively promoted localized menu development and adjusted store expansion strategies, and entered a new inflection point. In 2023, as the company grew in size and improved daily sales, adjusted net profit turned a loss into a profit of 8.78 million yuan. As of 1H2024, the company's network of stores reached 914, an increase of 36% over the previous year, making it the fastest growing brand among the top five pizzas in China.

There is room for improvement in industry penetration, and high-potential brands reshape the market pattern. Pizza is a highly standardized, highly addictive food category that is easy to localize, has diverse scenarios, and is suitable for takeout. In 2022, China had 11.7 stores per million people, while Japan and South Korea had 29.5 and 30.0 stores per million, respectively, in 2022, so there is plenty of room for market penetration. Changes in consumer groups, increased acceptance of dairy products, and the popularization of takeout are driving the expansion of China's pizza industry, and leading segments are expected to reshape the market pattern through product innovation. Domino's “30 Minute Must Arrive” and brand positioning are in line with industry trends, and market share is expected to continue to increase.

The company is in a phase of rapid expansion of stores and contrarian growth, and profitability is expected to continue to improve.

The company's core competencies lie in high-quality store development, delicious pizza with high quality ratio, efficient delivery experience, and digital capabilities. Focusing on the “onion ring” expansion strategy, the number of the company's stores is in a stage of rapid growth. We estimate that the medium- to long-term company domestic exhibition space exceeds 3,000. As of 3Q2024, the company's same stores have achieved 29 consecutive quarters of positive growth. Daily sales of single stores have improved and expanded operating leverage, and store profit margins have continued to rise, freeing up profit space.

Investment advice: The company is a leading domestic pizza delivery company with deep moats for supply chain, innovation and digital capabilities.

Currently, the company is in a stage where brand potential is increasing, same stores are growing against the trend, and scale is rapidly increasing; under the superimposed scale effect, the company's profits are gradually being released. We expect the company's revenue in 2024-2026 to be 4.1/5.4/6.6 billion yuan, corresponding PS 2.33/1.78/1.46 times, respectively; net profit to mother is 0.032/0.083/0.114 billion yuan, respectively. Covered for the first time, a “gain” rating was given.

Risk warning: Store encryption causes same-store diversion, increased market competition, macroeconomic fluctuations, and the lifting of the ban on restricted stocks