The performance was steady, with a month-on-month improvement in Q2. In 2023H1, the company achieved operating income of 4.159 billion yuan (yoy -4.9%), net profit of 70 million yuan (yoy +3.9%), net profit of non-attributable income of 44 million yuan (yoy +1.9%); of these, Q2 had revenue of 2,063 million yuan (yoy -8.9%) and net profit of 62 million yuan (yoy -37.6%) in a single quarter. Gross margin also fell 1.37 pcts to 28.11%, 23H1 optimized its cost control capability to reduce costs and increase efficiency. The R&D/sales/management/finance expense ratio reached 0.6%/19.2%/5.6%/0.8%, respectively, and net profit margin increased 0.15 pct to 1.66%. 23H1 plans to issue 1.04 billion yuan of convertible bonds, of which 764 million yuan will be used for retail terminal construction and 275 million yuan for intelligent logistics center construction.

The share of value-added business has increased, and a strong supply chain system supports product advantages. By business, maternal and child product sales/supplier services/maternal and child services/platform services/advertising services achieved revenue of 35.9/3.1/1.5/0.4/0.3 billion yuan, respectively, compared to -6.5%/8.2%/25.0%/-13.7%/-30.2%. The gross margin of mother and child products also fell 2.93 pcts to 18.40%, with milk powder revenue of 2.141 billion yuan (yoy -6.2%), gross profit margin of 15.88% (-1.58 pcts), diaper revenue of 478 million yuan (yoy +2.3%), and gross profit margin of 21.06% (-0.45 pct). The company continues to improve its differentiated supply chain system, upgrade short chain supply and customized exclusive supply to create popular products with cost advantages. The sales revenue of the 2023H1 differentiated supply chain is 305 million yuan, and the share of private brand products continues to rise. The share of revenue from value-added services increased steadily, with an increase of 2 pcts to 13%.

Channel construction accelerates development, and high-quality asset integration achieves regional complementarity. The company's same-city business has covered 45+ major cities. 1) Offline stores: As of 2023H1, the number of offline stores has reached 508 (4 new and 4 closed), including 277/78/75/78 stores in East China/Southwest China/Central China/other regions, with an average store efficiency sales revenue of 7.26 million yuan (yoy -6.5%), and a flat efficiency of 3135 yuan/square meter (yoy -4.98%). In July, Kid Wang Shoujia Children's Living Center officially opened in Nanjing, creating a new form of one-stop shopping and social networking for families. In the next 3 years, the Children's Living Center model is expected to be extended to 200+ large-scale stores in Tier 1 and 2 cities across the country, further enhancing brand influence; 2) Online channels: Kid Wang App already has 50+ million users, 5100+ million applet users, 10 million private enterprise users, and online sales revenue of mother and child products reached 1,527 billion yuan; 3) Channel integration: The company buys leading maternal and child entertainment chains in northern Beijing and Tianjin for 1.04 billion yuan. 65% of Amity International's shares are expected to integrate 693 of its stores and 7 major warehouses. It is estimated that after the merger and acquisition is completed, the number of the company's offline stores will reach about 1,100. The average single store area of Leyou International is 200-300 square meters. It penetrates the community with a high-density small store model. Combined with Kid Wang's offline 2000+ square meter store in the shopping center, it can deeply reach users. Combining a high-quality supply chain system with mature regional operating capabilities to achieve complementary business formats, further consolidating the leading position in the maternal and child retail industry.

The development of digital intelligence empowers operations, and localized services are implemented to the end. 1) Warehousing and logistics: A three-level warehousing system that matches channel sales has been established, with 1 fully automated central warehouse+4 core regional warehouses+6 central warehouses; 2) Digital intelligence services: The launch of a self-developed AI childcare consultant model, KidsGPT, will enrich the service system already established by 7,000+ childcare consultants, unlock the service track for all age groups, and enhance management efficiency. 3) Tongcheng Service: The local life team has achieved full coverage of 45+ cities, continues to set a benchmark for same-city operations, continuously optimizes and develops a full-link digital system for instant retail in the same city, and has a timely order fulfillment rate of 99%. Baicheng Wandian plans to build an urbanized service ecosystem and host hundreds of Aicheng events, with a total of 3w+ participants.

Profit prediction and investment suggestions: Child Wang is the leader in the mother and child retail channel. It has built core competitiveness with an offline retail layout and a high-quality supply chain system. Current performance benefits from a recovery in demand that has improved month-on-month, and the acquisition of Leyou and convertible bond issuance continues to empower medium- to long-term growth. We expect the company to achieve operating income of 9884/117.72/13.328 billion yuan in 2023-2025, and net profit of 251/417/512 million yuan. Currently, it corresponds to 42 times PE/2023, maintaining the “increase in holdings” rating.

Risk warning: store expansion falling short of expectations, increased industry competition, weak terminal demand, risk of mergers and acquisitions