Key investment points

1. One-sentence logic

Shandong is the leading offline retailer. The main business has been transformed and upgraded, losses have been reduced and accelerated outside the province, and the transformation of new business formats has opened up room for growth.

II. Logic that exceeds expectations

1) The main business is being renovated and upgraded, and the same store is expected to be restored

Market expectations: The main retail industry continues to be under pressure, and profits fall short of expectations

We predict:

The macroeconomy is in an improvement channel. The CPI for 24Q3-4 consumer goods is expected to be positive year on year, and price increases under a low base in 2025 are expected to drive same-store growth. The gap between online and offline scissors gradually decreased, and passenger flow gradually returned to offline.

Stock stores were adjusted, and they went to battle lightly. The company continued to adjust and operate stores that fell short of expectations. 24Q1-Q3 closed 4/17/16 stores respectively. The stock of stores changed from focusing on quality management in terms of category structure, product quality, price-quality ratio, service, environment, etc., and their attractiveness to customers increased. 24H1 increased passenger traffic by 13.69% compared to supermarket stores. Cost-side companies improve store operating efficiency through optimization of store area, products, processes, systems, etc., and the cost rate of comparable stores has decreased markedly.

Sales are expected to be boosted by the restructuring and upgrading of stores. Retail is shifting from product price competition to experience upgrading. The company promoted store reform. The SPAR Weihai Chengtong store was upgraded and opened in October, reducing 3000+ homogenized products and introducing 900+ stylish and personalized products; the pasta area has an open kitchen with more than 230 types of cooked food. Product replacement and service upgrades enhance the consumer experience, and overall customer flow and daily sales are expected to be boosted.

Supply chain changes, moving from KA to direct procurement. In the past, supermarkets were similar to second landlords. They relied on supplier rebates and back-office gross profit, and lacked the ability to manage and control products. The result was a high price increase ratio for homogenized products and products under redundant channels. Therefore, in August '24, Jiajiayue, Yonghui, etc. fully launched the direct procurement reform. The store side demanded that the price be the same as the dealer's, de-centralize, and require retail price stores to be autonomous and no longer limited by the brand's price. Under the bare mining model, front and back office fees are eliminated, inventory risk is transferred to stores, and product selection requirements are raised. The company is expected to shift to manufacturing retail, and supply chain transformation will drive an increase in product power.

2) Accelerate loss reduction outside the province and contribute to profits

Market expectations: Inner Mongolia, Hebei and other places outside the province continue to lose money, and the company's competitiveness cannot be replicated outside of the province. We expect:

Revenue and earnings outside the province are expected to improve substantially. After 2018, while deepening the regional market, the company accelerated mergers and acquisitions outside the province and expansion outside the province. After 2022, the company adjusted its strategy in a timely manner, slowed down the pace of exhibition stores, and paid more attention to upgrading the quality and profit improvement of existing stores outside the province. 24Q1-24Q3 revenue outside the province was 2.2 billion yuan, +8.29% year over year, gross profit margin 19.2%, and +0.27% year over year. Revenue growth and gross profit growth were better than within the province. Earnings in Inner Mongolia and other places improved dramatically. 24H1 Inner Mongolia Wilehui made a profit of 20 million yuan, +240% over the same period last year. We expect that Hebei, Northern Jiangsu and other places are also expected to gradually reduce losses.

3) New business formats test the waters and speed up

Market expectations: Jiajiayue's new business format is progressing slowly and contributing less to the company's profits. We expect:

The company has the ability to respond quickly and learn to new retail business formats. It has successively tried various business formats such as member stores, snack discount stores, hard discount stores, bakery stores, etc. It is the vanguard of every round of offline retail reform. It always meets consumer needs, and the impact on profits from the reporting side during the testing process is not significant. The reform is solid and effective.

The discount model is progressing steadily, and store opening under the franchise model is expected to accelerate. The company has two discount formats: snack discount+hard discount. Yue Ji Good Snacks was founded in Weihai and is positioned as a one-stop retail collection store with the ultimate cost performance ratio.

The Haohuixing discount supermarket has a smaller store area, and the price is 10%-15% lower than regular stores. It selects SKUs, focuses on its own brands and customized products, and has built its own logistics system. As of 2024Q3, the company has 125 snack stores and 10 Haohuixing discount stores.

The bakery market layout is speeding up. Since opening its first store in Weihai, Shandong on July 13 this year, the company's baking brand Joybake has set up 50 stores nationwide as of October 2024. With freshly baked bread as the core, Jiayue Baking provides a variety of comprehensive bread categories including bread, pastries, and cakes. The products are more cost-effective, and dozens of new products are added every month. We believe that the transformation and upgrading of cooked baked goods is an important part of this offline supermarket cycle. It relies on turnover rather than price increases, making it more attractive to young people, strengthening retention and repurchasing, and driving up Zabai's sales.

III. Inspection and Catalysis

Inspection indicators: improvement in same-store conditions, loss reduction outside the province, daily sales after the transformation of the new business format.

Catalysts: Passenger traffic exceeds expectations, customer unit prices continue to rise, and the transformation of new business formats is strong. IV. The value of research

A different understanding: The market is concerned about the company's weak growth, and the same stores are affected by macroeconomic fluctuations. However, we believe that under the trend of increased policies and a recovery in customer flow, the bottom of the price side is rising, the company's stock stores continue to be adjusted, adjustments are being accelerated, products and services continue to upgrade and acquire customers, and cost ratio optimization is declining. Outside the province, there has been a shift from scale to profit, and existing stores have drastically reduced losses. The new business format has accelerated layout, and the discount model and baking model have entered a verification period.

5. Profit forecast and valuation

The company's revenue is expected to be 18.269/19.483/20.236 billion yuan in 2024-2026, +2.85%/+6.64%/+3.87% YoY, net profit to mother of 0.228/0.279/0.335 billion yuan, +66.80%/+22.45%/+20.37%, corresponding to 2024-2026 PE 32X/26X/22X, maintaining the “buy” rating

6. Target price and space

The average PE of comparable companies in 2025 was 56X. Taking into account the certainty of Jiajiayue's performance, a 40 times PE valuation was given, corresponding to a target market value of 11.1 billion yuan, which currently corresponds to an upward space of about 55%.

7. Risk Factors

Consumption recovery falls short of expectations, competition increases risk, and passenger flow fluctuation risk.