2Q24 net profit in line with market expectations

1H24 achieved total revenue of 10.915 billion yuan, an increase of about 392.5% year on year. Among them, the snack sales business achieved operating income of 10.674 billion yuan, an increase of 447.8% year on year; net profit to mother was 0.001 billion yuan, an increase of about 116.8% year on year. 2Q24 achieved operating income of 6.085 billion yuan, a year-on-year increase of about 318.3%; net profit to mother -0.005 billion yuan, a year-on-year loss reduction of 90.9%.

Development trends

The revenue of 1H24 snack stores was 10.674 billion yuan. At the end of the period, the number of stores reached 6,638, and the profit situation increased steadily in 1Q-2Q. Store situation: 1H24 is actively promoting store network expansion plans, deepening encryption in advantageous regions such as the Yangtze River Delta and North China, rapidly expanding stores in Northeast/Northwest/South China during the same period, and promoting a nationwide layout. During the 1H24 period, 2,105 new stores were added (of which the number of new stores in East China/Central China/North China accounted for about 46%/11%/13%, respectively), 193 stores were closed, and 6,638 stores were closed at the end of the period. Profit situation: According to the announcement, the 1H24 gross margin of the company's snack sales business increased steadily from month to month (over 11%), and the net profit of the 1Q24-2Q24 snack sales business (after excluding accrued share payment fees) was 0.117/0.163 billion yuan, respectively, and the corresponding net interest rate was 2.5%/2.7%. Edible fungus business: 1H24 is relatively off-season and the market price is low. 1H24's revenue was -10% year-on-year, and there was a loss.

The company plans to transfer 49% of Sun Company Wanhao's shares for 0.294 billion yuan to accelerate the snack volume sales business. After the acquisition was completed, the company held a total of 75.52% of Nanjing Wanhao's shares through direct shareholding and indirect shareholding of Nanjing Wanxing Commercial Management Co., Ltd. According to the announcement, the target company's Wanhao business situation: 2023/1Q24 revenue was 2.91/1.4 billion yuan; 2023/1Q24 net profit was -0.055 billion yuan/+0.027 billion yuan, respectively, and 1Q24 business profit was corrected (net interest rate of about 1.9%).

Outlook 2H24: Snack volume sales are expected to maintain a relatively rapid growth rate, and profit margins are expected to be stable. 2Q-3Q is the peak season for mass snack stores to open. We expect 2H24 mass snack stores to continue to expand. In addition, 1H24 gross margin increased steadily and slightly from month to month. If the subsequent competitive pattern is further concentrated, gross margin is expected to improve further.

Profit forecasting and valuation

We maintain the company's profit forecast for 2024/2025, and the current stock price corresponds to 35.8/12.2 times P/E for 24/25. Considering that the company plans to transfer 49% of Sun Company Wanhao's shares, catalyzed by 0.294 billion yuan, we raised the target price by about 30.5% to 35.5 yuan (37.3% share price upward space). The target price is based on segmented valuation: we expect the snack sales business to enter a relatively stable state in 2025 corresponding to 18 times P/E in 2025 with a market value of nearly 5.7 billion yuan. We expect that the profit of edible fungi in 2025 corresponds to a reasonable market value of about 10 times the market value of P/E nearly 0.57 billion yuan. Taken together, it gave a total target market value of about 6.3 billion yuan in 2025, maintaining an outperforming industry rating.

risks

Changes in demand in the mass snack market; new business development and integration risks; increased industry competition; risk of seasonal fluctuations in edible fungus sales prices; food safety issues; risk of equity pledges by major shareholders.