Incidents:
Zhou Heiya released its 2023 annual report. In 2023, the company achieved operating income of 2,744 million yuan, +17.1% year over year; realized net profit of 116 million yuan, +357.1% year over year; realized net profit deducted from non-mother of 82 million yuan, an increase of 160 million yuan over the previous year.
Investment highlights:
Strongly lay out key transportation hubs, and store operations place more emphasis on quality. The number of stores increased by 387 to 3,816 in 2023, and the number of stores expanded steadily. Looking at the separate store areas, there was the biggest increase in transportation hub stores. Zhou Heiya had a strong presence in transportation hubs in key cities such as Wuhan, Guangzhou, Shenzhen, and Shanghai. Specifically, in 2023, the number of transportation hub stores (including airport and train station stores) was 319, an increase of 141 over the previous year; the number of business district, commercial and supermarket stores was 2256, an increase of 157 over the previous year; the number of community stores was 845, an increase of 53; and the number of other stores (including subway, bus terminals, and campus stores) was 396, an increase of 36. By sales method, direct management is driving the increase in the number of stores. Franchise stores are expected to be affected by the weak recovery in supermarket community consumption, and store growth is slowing down. The number of directly-managed stores in 2023 was 1,720, an increase of 274 over the previous year, driving revenue growth of 26.89% to 1,466 billion yuan; the number of franchised stores was 2,096, an increase of 113 over the previous year, driving a 13.0% increase in franchise revenue to 783 million yuan; online revenue of 396 million yuan, or -5.13% year over year, which is expected to be a high base for 2022.
In terms of store quality, the revenue of directly-managed stores in 2023 was 850,000 yuan, +7% compared to the same period; franchised stores earned a single store revenue of 370,000 yuan, +7% compared with the same period last year, and the quality of store revenue increased. In the future, it is expected that the company will pay more attention to store quality, and the speed of store expansion will be more steady.
The expansion of the product price band effectively increases the number of customer orders and accelerates the integration of online and offline channels. On the product side, in order to adapt to the current consumption environment, the company is actively expanding the product price range vertically and horizontally expanding the product categories, such as launching a 9.9 yuan snack pack and 39.9 yuan 3 boxes. Of these, products of 14.9 yuan and below account for 17% of the average monthly sales. The increase in the share of low-priced products reduced the annual customer unit price by 1.73% to 56.90 yuan year-on-year, but it effectively led to an increase of more than 20% in the number of customer orders. On the channel side, the company accelerated the integration of online and offline channels, and the home delivery business boosted the supper scene. The supper takeout sales reached 133 million yuan; the in-store business attracted stores through Douyin and Meituan's products and vouchers, etc., with a GMV of nearly 80 million for the whole year, with a write-off rate of over 70%.
The cost side is under pressure, and rate optimization drives increased profitability. The company's gross margin in 2023 was 52.42%, -2.61 pct year on year, mainly affected by the sharp rise in raw material prices.
On the expense side, the sales/management/ finance expense ratios in 2023 were 35.83%/11.55%/0.86%, respectively, compared to -3.88pct/-1.70pct/-1.63pct. The overall expense ratio decreased significantly. It is expected that the company's expense investment efficiency is improving, and revenue growth will reduce cost amortization. Under the increase in revenue scale and rate optimization, the company achieved a net profit margin of 4.21% to mother in 2023, +3.13pct compared to the previous year. Currently, raw material prices are showing a downward trend, and the company's gross margin is expected to be repaired and profitability further strengthened.
The company actively rewards shareholders. In 2023, dividends were paid out of HK$0.05 per share. The total amount of dividends was approximately $108 million, accounting for 93.5% of the annual net profit. Furthermore, the company plans to use no more than HK$400 million to buy back the company's shares in the open market from March 28, 2024 to 2025, demonstrating the company's determination for long-term development and effectively boosting shareholders' confidence.
Profit forecast and investment rating: The company is currently innovating and experimenting with a two-in-one store model of fresh-locked and hot halide, which is expected to improve store efficiency in the future. In addition, raw material costs are expected to be gradually reduced, and the company's profitability will be further restored. Therefore, we have adjusted the company's profit forecast. The company's 2024-2026 EPS is 0.08/0.10/0.13 yuan, respectively, and the corresponding PE is 21/16/12X, respectively, maintaining a “buy” rating.
Risk warning: 1) Fluctuations in raw material supply prices affect the company's gross margin and profitability; 2) the development of new store models falls short of expectations; 3) Store expansion falls short of expectations; 4) Management risks brought about by the expansion of the store management radius; 5) Online expansion falls short of expectations.