Incident: On October 29, the company announced its three-quarter report. In the first three quarters, the company achieved revenue of 6.347 billion yuan/year on year -0.58%, net profit of 117 million yuan/year on year -22.95%, net profit after deducting non-return net profit of 856.51 million yuan/year on year -24.24%. Among them, the share payment amount in the first three quarters was 72.006 million yuan due to the implementation of equity incentives. Excluding the impact of convertible bond interest expenses and share payment expenses (the impact of related income tax expenses has been taken into account), 2023Q1-Q3 companies achieved a total of net profit from the mother. 186 million yuan (net profit of 237 million yuan was realized in the same period in 2021).

The year-on-year revenue growth rate was corrected, superior to peers, and the performance was generally in line with expectations. 1) Revenue side: During the reporting period, the company had steady showrooms. According to previous interim reports, 2023H1 added 4 new stores and closed 4 stores, and by the end of 2023H1, 508 stores (500 stores in the same period last year); since entering the third quarter, according to company announcements, the company's revenue growth rate has been corrected year over year, and 2023Q3 achieved revenue of 2.188 billion yuan/year on year +8.81%. Excluding the impact of the base figure, its business optimization was superior to that of peers. 2) There was a slight decrease in gross margin, and the gross margin of 2023Q3 companies was -0.1pct to 31.6% yoy; looking at the third quarter alone, the company's sales expense rate/management expense rate/R&D expense rate/ financial expense ratio was +0.2pct/1.0pct/-0.4pct/0.3pct to 21.3%/5.6%/0.5%/1.2%, respectively, which is basically stable. Overall, in the third quarter, the company achieved net profit of 474.207 million yuan/year on year -44.12%, net profit after deducting net profit of 41,576 million yuan/year on year -40.45%. If the impact of equity incentive expenses were reduced, net profit of 68.729 million yuan was realized, which is basically in line with expectations.

Deeply cultivate single customers and take a multi-pronged approach. In 2023, the company focused on the strategic positioning of “global preferred differentiated supply chain+local parent-child growth service+instant retail in the same city”, focusing on the six strategic paths of “deep membership cultivation, omni-channel management, global preferred differentiated supply chain, local life, global marketing, and new projects”. Among them: 1) 2023H1 achieved differentiated supply chain sales revenue of 305 million yuan, accounting for 8.49% of maternal and child sales revenue, continuing to increase; 2) Omni-channel operations were fully upgraded, offline acquisition of friends, expanding leading advantages, and online store expansion; Full layout of the live broadcast Business, 2023H1's online sales revenue accounts for 42.49% of product sales, and has built a living center for children of all ages. The first store has opened in Nanjing. According to 36kr, the product transaction volume/service transaction volume for children aged 4-14 increased by more than 30%/90% over the same year; 3) Upgrading digital services in the same city, continuously upgrading timed products, continuously optimizing the full-link digital system for instant retail in the same city to enhance compliance capabilities, and establish a local lifestyle professional operation team to launch the 100 million stores plan, and join the city's leading alliances to achieve member resource sharing. 4) In addition, the “AI Child Care Consultant Big Model” independently developed by the company, KidsGPT Smart Advisor, was officially launched in June, marking the further development of digital intelligence.

Investment suggestions: The company is a mother and child company with omni-channel operation capabilities. Focusing on the strategic positioning of “global preferred differentiated supply chain+local parent-child growth service+instant retail in the same city”, the company continues to make breakthroughs in the six major strategies of “deep membership cultivation, omni-channel management, global preferred differentiated supply chain, local life, global marketing, and new projects”. Considering the merger of Leyou in August 2023 and the impact of the low base in the second half of last year, the 2023H2 performance is expected to recover further. We expect the company's revenue for 2023-2025 to be 92.93/115.27/12.500 billion yuan respectively, and considering the recovery rate since 2023Q1-Q3, we lowered the net profit forecast to 1.85/3.47/427 billion yuan. EPS is 0.17, 0.31, and 0.38 yuan/share, respectively. The current stock price corresponding to PE is 52/28/23 times, maintaining the “increase in holdings” rating.

Risk warning: 1) The exhibition store fell short of expectations for a long time. 2) Competition in the industry has seriously intensified. 3) Digitalization and warehousing logistics construction fell short of expectations.