Why did third-quarter growth fail to meet earnings expectations?

  • Accelerated store openings drove year-on-year revenue growth of 49% in the third quarter of 2026; an improved product mix, economies of scale and a recovery in edible mushroom business margins lifted the gross margin by 0.9 percentage points year on year to 12.7%.
  • However, third-quarter net profit was 628 million yuan, up 64% year on year but still below HSBC Qianhai Securities’ and market expectations. The firm believes rising labor costs to support faster franchise expansion and investment in consumer-facing channel branding raised the selling expense ratio by 1 percentage point year on year, offsetting part of the gross margin improvement.

How is the company pursuing sustained growth beyond store expansion?

  • At an analyst meeting, management placed greater emphasis on balancing expansion and profitability and on long-term sustainable development. By the end of the third quarter of 2026, membership had grown from 190 million at the end of 2025 to 290 million; nearly seven in ten were active members, and the number of repeat purchases exceeded 3.
  • HSBC Qianhai Securities attributed membership growth and improved repeat purchasing to high-quality locations, greater operating efficiency, continued channel investment and category expansion, including fresh snacks and private-label products. However, the report also noted that declining sales per store were one reason for market concerns about near-term profitability.

Why were profit forecasts cut while revenue forecasts remained broadly unchanged?

  • HSBC Qianhai Securities expects the company to continue investing in consumer operations, new products and supply-chain efficiency, resulting in slower operating margin expansion. The firm kept its 2026–2028 revenue forecasts broadly unchanged while raising its selling expense forecasts for each year by approximately 14%.
  • Following the revisions, the firm forecasts net profit of 2.552 billion yuan, 3.199 billion yuan and 3.533 billion yuan in 2026, 2027 and 2028, respectively, cuts of 3.6%, 7.1% and 11.4% from its previous forecasts. With a more cautious view of store openings and margin expansion in 2027–2028, its profit forecasts for the latter two years are 7.3% and 10.6% below the Wind market consensus, respectively.
  • Store expansion remains an important variable in the profit model. The firm’s 2026 base case assumes a net increase of 12 thousand stores; all else equal, if net additions exceed the base case by 1000 stores, it expects net profit for that year to rise 3.4%.

How do changes in earnings expectations affect valuation?

  • HSBC Qianhai Securities maintained its buy rating and cut its target price by 24% from 295.70 yuan to 225.70 yuan. The firm retained its discounted cash flow valuation, with a discount rate of 10.4% and a perpetual growth rate of 1.0%; the cut mainly reflects lower earnings expectations, with forecast compound annual operating profit growth for 2025–2035 falling from 14% to 11%.
  • Compared with the closing price of 141.55 yuan on 26 October 2026 used in the report, the new target price implies upside of approximately 59%. Catalysts listed in the report include faster store openings, a recovery in revenue per store and acquisitions of minority interests; slower-than-expected expansion and delays in completing acquisitions are downside risks.