Incident: The company announced its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 534 million yuan/year on year +56.16%, net profit due to mother of 31 million yuan/year on year +2.60%, and net profit after deducting net profit of 28 million yuan/year on year. Among them, 2023Q4 achieved revenue of 152 million yuan/year over year, net profit of 6.55 million yuan/year on year +71.40%, net profit of 5.54 million yuan/year on year after deducting net profit of 5.54 million yuan/year on year. With 2024Q1, the company achieved operating income of 160 million yuan/year on year +67.28%, net profit of 4.66 million yuan/year on year +13.94%, net profit of 4.67 million yuan/year on year after deduction of non-return net profit of 4.67 million yuan/year on year.

The results were generally in line with expectations.

The store was opened in 2023, and the contract was continued, and the brand building continued to be strengthened. RevPar is superior to peers. In 2023, the company continued to expand and improve its brand matrix. 1) Showrooms: In 2023, the Group opened 55 new contracted hotels, 34 newly opened hotels, Junting opened 6 new directly-managed stores, and opened 3 new commissioned managed hotels. By the end of 2023, 23 direct-run stores and 40 commissioned managed stores had been set up, with a total of 63 stores; Junlan opened 16 newly opened, with a total of 115 hotels; and Jinglan opened 7 new commissioned managed hotels, 2 franchised hotels, for a total of 39. 2) Single store: Throughout 2023, the RevPar of Junting's directly-managed hotels was 332.78 yuan (+53.39% compared to 2022/+15.89% compared to 2019), OCC was 67.85% (+13.77pct compared to 2022/+0.63pct), and ADR was 490.46 yuan (+22.26% compared to 2022/+14.82% compared to 2019). RevPar was superior to peers. During the reporting period, the company continued to strengthen brand building, promote digital construction, actively promote the digital transformation of human resources, and set up Shanghai Junda City to test the waters for comprehensive hotel asset management.

The opening of the new project combined the impact of foreign exchange and the refund of commercial property subleases at Junting Hotel. Costs and expenses have increased, and the performance is in line with expectations. 2023:1) The rental cost of investing in a directly-managed hotel during the preparation period was confirmed, and management expenses were still included during the rent-free period. The management expenses increased by 385.07 million yuan over the reporting period; 2) Huihe Junting Hotel's subleased commercial property (Hangzhou Huihecheng Shopping Mall and corresponding garage) was returned to the original owner, and the rent difference balance of 10.3466 million yuan confirmed in accordance with the requirements of the new leasing guidelines was recorded as a one-time profit and loss of the current period. Combined with the impact of the opening of new projects, during the reporting period, the company's gross profit margin was 39.7% /+3.7pct, sales expense ratio of 8.4% /+1.9pct, management expense ratio +3.0pct to 14.6%, financial expense ratio -0.2pct to 6.1%, achieving operating income of 534 million yuan/year on year +56.16%, net profit to mother of 31 million yuan/year on year +2.60%, net profit not returned to mother. The performance was in line with expectations.

The strong layout continues in 2024. In 2024, the company will continue to take advantage of the collaborative sharing advantages of the “Junting”, “Junlan” and “Jinglan” brand development teams, establish regional development centers in Beijing, Southwest China, Yangtze River Delta and Greater Bay Area, expand the development team, and comprehensively implement the “direct management+entrustment management” business model. It plans to sign 60 contracts and open 63 projects, optimize the organizational structure, upgrade the membership system, and deepen digital transformation.

2024Q1 Company's direct-run store RevPar continued to grow. OCC/ADR/RevPar was 61.5% /512 yuan/315 yuan, respectively, -1.8pct/ +15.5%/+12.2% year over year, including: 1) Shanghai regional hotels were steady, moderate and positive; Shanghai Zhongxing Junting (2023Q1 renovation and upgrade) exceeded 80% OCC in the first quarter and RevPAR was about 550 yuan, reaching the same level as in 2019. Shanghai Pagoda Junting Hotel OCC increased dramatically. RevPar +9.57% compared to 2023Q1/+21.26% compared to 2019Q1. 2) Direct stores in the Hangzhou area increased steadily, with Hangzhou Qianyue Junting RevPar +48.7% year over year 2019, Hangzhou Xinjunting RevPar +42.6% year over year 2019, Hangzhou Pagoda Junting Design Hotel RevPar +18.5% year over 2019; 3) Strong performance in Sichuan and Chongqing, with the Q1 occupancy rate of Chengdu Pagoda Junting Hotel stabilized above 92%, and RevPar remained at 720 yuan, an increase of about 20% year on year; the occupancy rate of Chongqing Grand World Junting Hotel exceeded 60 in the first month of opening %. The average housing price for the next month was over 450 yuan. 2024Q1, the company achieved operating income of 160 million yuan/YoY +67.28%, net profit of 4.66 million yuan/YoY +13.94%, net profit of 4.67 million yuan/YoY +52.45%. As of 2024Q1, Junting/ Junlan/ Jinglan had 64/118/37 hotels in operation and 24/122/31 hotels to open, respectively.

Investment advice: The domestic high-end hotel pattern is undecided, and high-end local hotels are expected to break through. The company has been deeply involved in the middle and high-end for many years, and is good at single stores and steady expansion. The merger and acquisition of Junlan and Jinglan helped improve the company's product matrix, change scale, and steady growth. The company may now be at an inflection point in expansion: in 2023, both direct management and contract management accelerated the opening of stores. At the same time, the company established a new Shanghai Junda City to launch asset management business and continuously improve the membership system; however, due to store opening and preparation, the short-term performance was affected. Referring to the above, we adjusted the company's 2024-2026 revenue to 738 million/892 million/1,070 million, and net profit to mother to 41 million/196 million/162 million. The current stock price corresponds to PE of 112X/48X/28X, respectively. Considering the company's accelerated expansion and subsequent performance growth and valuation, we raised it to a “buy” rating.

Risk warning: 1) Store expansion falls short of expectations; 2) Costs and expenses seriously hamper performance; 3) Industry competition intensifies.