Incident: The company released its report for the first quarter of 2023:2023Q1 achieved operating income of 192 million yuan, a year-on-year decrease of 0.38%; realized a net profit loss of 32 million yuan, a year-on-year decrease of 92.55%; after deducting non-net profit loss of 34 million yuan, a year-on-year decrease of 57.9%; net operating cash outflow fell 11.18% year-on-year.

Sea Travel's investment plan was updated, promising high performance growth: the transaction was priced at 4,080 billion yuan, of which 85% of the shares were paid, or 3.468 billion yuan, and 612 million yuan was paid in cash. At the same time, no more than 95 million shares were issued. Sea travel duty-free promises that the net profit of 2023-2026 will not be less than $1.98/3.26/4.80/587 million yuan, 2023-

2025 was +65%/47%/22%, respectively, of which 2023Q1 has achieved 51.62% of the annual target.

Q1 Profitability improved dramatically, with a net interest rate of 7.09%: 2023Q1, Sea Travel achieved operating income of 1,396 million yuan and net profit of 99 million yuan. The corresponding net interest rate was 7.09%, a significant improvement over the previous year. 23Q1 The number of customers on the island was clearly divided, and the duty-free sea travel operation was under pressure during the Spring Festival. The customer unit price for January, February, and March '23 was 0.32/0.30/0.34 million yuan respectively, and 0.36/0.38/0.42 million yuan for the same period. With the subsequent normalization of passenger flow and the increase in the proportion of boutiques, the improvement in customer unit prices is expected to further drive the release of the company's profits.

Direct supply chain procurement is gradually being implemented, and gross margin is expected to improve: in 2022, Sea Travel's procurement ratio from Lagardère fell further to 68.43% from 77.53% in the same period last year. As of March 2023, the company had established direct procurement relationships with 695 brands including Montblanc, Earl, Shafrat, Tasch, and Breitling. As of March 2023, the company had 1,010 brands and 109,000 SKUs, an increase of 4%/29% respectively over the end of '22. As the company continues to grow in size in the future, the increase in the share of direct procurement and the improvement in supply chain construction are all expected to further increase gross profit margins and drive the release of the company's profits.

Investment advice: The company's traditional business is expected to remain stable in the context of the restoration of passenger flow in Hainan. Sea travel duty-free is growing rapidly, and the injection work is progressing steadily. A successful injection is expected to form a second growth curve. We expect the company to achieve operating income of 1,089/12.21/1,310 million yuan in 2023-2025 and net profit of 0.65/0.79/095 million yuan. The corresponding PE was 107.34/87.59/72.82 times, respectively, maintaining the “buy” rating.

Risk warning: Hainan passenger flow recovery falls short of expectations; asset injection falls short of expectations; industry competition intensifies