1Q24 results are in line with our expectations
The company announced its 2023 results: revenue of 30.52 billion yuan, down 5.5%; net profit to mother of 40 million yuan, down 40.8%, lower than our expectations, mainly because the restoration of the supermarket business was slower than expected; deducted non-net profit of 190 million yuan (-240 million yuan for the same period in 2022). On a quarterly basis, Q1-Q4 revenue was -7.7%/+0.2%/-9.6%/-3.1% year-on-year; deducted non-net interest rates were 2.0%/1.2%/0.1%/-1.2%, respectively.
In the 1Q24 period, the company's revenue was 8.83 billion yuan, down 7.0%; net profit to mother was 190 million yuan, down 7.7%, basically in line with our expectations.
Development trends
1. Ole's business has performed well, and the supermarket business is under relative pressure. By business type: 1) Department stores, shopping centers, and Ole showed a marked recovery in 23. Revenue increased by 11.1%/23.7%/41.5%, respectively, and 1Q24 revenue was -10.7%/-1.6%/+2.0% year over year. Traditional department stores are under pressure, and the Olay business, which adapts to the cost performance trend, is excellent. We expect that the main reason is that consumer sentiment is cautious. The company closed 1 shopping center in '23, and the number of department stores, shopping centers, and Ole stores was 12/22/9, respectively. 2) Biaocao 2023/1Q24 revenue increased by -1.6%/+1.5% year-on-year, with a net increase of 80/34 stores respectively, maintaining relatively stable revenue under channel expansion; big stores fell 20.7%/16.8%, respectively, and the number of stores decreased by a net of 14/remained flat, under pressure due to intense market competition and channel sorting; 3) Convenience stores 2023/1Q24 revenue decreased by +5.9%/-2.5% year-on-year, with a net decrease of 62/33 stores, respectively.
2. Expenses have been steadily improving, and the REITs implementation cycle has led to fluctuations in net profit. Gross margin also increased by 1.6ppt to 26.5% in '23. Among them, gross margins of shopping malls and Ole significantly recovered, and gross margin dropped slightly by 0.4 ppt to 24.6% in 1Q24, mainly dragged down by traditional department stores and supermarkets. Overall cost control was stable. The rate decreased by 0.3/0.1ppt to 23.9%/19.3% respectively during the 2023/1Q24 period, mainly due to the decline in sales and finance rates. In addition, investment income also fell by 1 billion yuan in '23, mainly due to the higher base for 22-year REITs products.
Under the combined influence, 2023/1Q24 net interest rates were -0.8pp/ flat at 1.3%/2.2%, respectively, after deducting non-net interest rates of +1.4pp/ -0.2ppt to 0.6%/1.8%, respectively.
3. The transformation of the main business continues to advance, and asset securitization has made further progress. 1) Store upgrade: The company's stores are transforming to high quality and youth, focusing on diverse community consumption. Qingpu Olai upgraded the spatial environment to help increase both passenger flow and sales. Bailian Xijiao, which opened after renovation in December last year, created a “business+community” space, and upgraded the flow line, brand, etc. in multiple ways. 2) Digital construction: The company continues to promote digital consumer operations, and the number of members increased by 8.0% to 32.89 million in 2023. 3) Asset securitization: In July '23, the board of directors reviewed and approved the application for REITs products using Bailian Yaoyicheng as the standard. It was accepted in January of this year. We believe it is expected to stock high-quality assets for the company, improve quality and efficiency, and keep an eye on future progress.
Profit forecasting and valuation
Considering weak consumer sentiment and fierce competition in the supermarket sector, the net profit forecast for 2024 was lowered by 19% to $590 million, and a net profit forecast of $640 million was introduced for 2025. The current stock price corresponds to 27/25 times P/E in 2024/25. Maintain an outperforming industry rating. Based on profit forecast adjustments, the target price was lowered by 19% to 11 yuan, corresponding to 33/31 times P/E in 2024/25, with 24% upside.
risks
Competition in the industry has intensified; applications for duty-free licenses are uncertain; the results of business transformation have fallen short of expectations.