Hongqi Chain released 3Q24 results, with Q1-Q3 revenue of 7.77 billion yuan (yoy +1.65%) and net profit of 0.39 billion yuan (yoy -4.21%) to mother. Q3 achieved revenue of 2.58 billion yuan (yoy -2.17%) and net profit of 0.12 billion yuan (yoy -17.91%) to mother. Earnings in the third quarter were under pressure due to cautious consumer sentiment and increased market competition. The company continues to optimize stores, improve the product structure, improve the logistics distribution system, and steadily increase the share of convenience stores in Sichuan Province. Maintain an “Overweight” rating.

Cautious consumer sentiment and the impact of market competition have put pressure on the revenue side. The Q3 company's revenue fell 2.17% year over year, and the growth rate decreased 4.92 pcts month-on-month compared to Q2. We expect this is mainly due to weak CPI and intense market competition dragging down the same store. According to the city plan, the company adjusts the channel layout, measures stores that have been difficult to overcome losses over a long period of time, and makes adjustments to related stores. The company announced plans to transfer 20% of its shares in Gansu Hongqi to Lanzhou State-owned Assets Limin Group Co., Ltd. at a price of 1 yuan to divest non-performing assets. We believe it will help the company concentrate resources on the adjustment and upgrading of existing stores.

The gross margin remained steady, and the cost ratio increased slightly

Q3 The company's gross margin remained flat at 29.4% year on year, up 1.3 pct from the second quarter. The company continued to step up its own product development efforts and applied the Hongqi Cloud Big Data Platform to optimize the supply chain and improve cost control capabilities. On the cost side, the company's sales expense ratio also increased by 0.4 pct to 22.8%, or was dragged down by pressure from the same store.

The management fee rate increased slightly by 0.1 pct to 1.6%, and remained stable overall. Under the combined impact, the company's net profit margin decreased by 0.9 pct to 4.8% year on year.

Actual controller changes are progressing steadily, and attention is being paid to the results of management adjustments and upgrades

The company's equity change work is progressing steadily. After the transfer was completed, the actual controller changed to Sichuan Commercial Investment, waiting for state-owned assets to inject new momentum into the company's development. The company's various business adjustments are progressing steadily. Consumer feedback from the company's own brand “Hongqi Preferred” is good, and future plans are to develop more in-house products; strengthen investment in information technology in the supply chain, improve store product management and provide partners with more comprehensive information services; and use logistics advantages to increase store delivery services. Pay attention to the results of the follow-up promotion of various business upgrade measures.

Profit forecasting and valuation

Maintain the 2024-26 net profit forecast of 0.6/0.62/0.65 billion yuan. Referring to the consistent forecast of 26.6xPE in 25 years, considering the company's actual controller changes and the pace of business transformation, 12.4xPE for 25 years was given, and the target price was maintained at 5.72 yuan.

Risk warning: The actual controller changes are uncertain; the recovery of terminal consumption falls short of expectations.