In the second half of the year, the recovery is good, and the proportion of self-reporting by sea bass has increased.

Recovery in the Second Half of the Year, Self-supply Ratio of Luyu Fish Increased

The following is a summary of the mid-term report conference call of Jiumaojiu 2022, and the financial report interpretation can be reviewed in Jiumaojiu: Going through the darkest moment, only to be fully revived?

Management's Remarks

1. In the first half of the year, we were much more severely affected by the epidemic than expected at the beginning of the year. In addition to the direct loss of revenue caused by long-term closures, there were many other impacts. For example, our colleagues who opened shops were unable to go to the on-site warehouse, and the project colleagues were unable to confirm the project conditions on site, which affected our pace of opening shops. Logistics warehouses in some epidemic areas were also affected by epidemic control measures, and we had to urgently transfer goods from other warehouses, resulting in some additional expenses. Although there may have been some expectations, our profits in the first half of the year were indeed greatly affected. Therefore, at the beginning of August, we timely issued a profit warning to the market. The outlook for the second half of the year also depends on the impact of the epidemic, and we will continue to adjust and improve efficiency during this period.

2. Opening and closing of several main brands in the first half of the year: Tuo'er Sour Fish opened 35 new stores in the first half of the year and closed 1 store, with a net increase of 34 stores. Due to the impact of the epidemic, the annual target for new stores was adjusted from 150 at the beginning of the year to 120. Songhuo Hotpot opened two stores, but because Tai'er paved the way in front, the subsequent stores were less affected by the epidemic. Moreover, feedback from the property side and the customer side showed that Song was slightly above expectations, so the target for opening Song stores was adjusted from 10 to 15. Jiumaojiu Northwest Cuisine closed 6 stores mainly due to the expiration of store leases. Good stores were renewed and bad stores were temporarily not renewed. But from the recent performance of Jiumaojiu Northwest Cuisine, the data is gradually recovering, so it is not ruled out that we will try to open a new store at the right time.

3. The focus of team resource construction in the first half of the year was on cooperation with universities: first, campus recruitment of graduates; second, targeted training of college students, divided into two development directions: catering technology research and development and catering management; Third, collaboration with university research resources with our R&D team; Fourth, establishment of brand scholarships and laboratories to improve brand awareness.

4. Supply chain: The supply chain is proceeding step by step. In the first half of this year, our self-produced Luyu fish accounted for about 40% of the total usage, which is similar to the data in last year's annual report. Because one of our partners has already successfully put into production at the beginning of last year, the production capacity has also increased in sync with the development of Tai'er in the past two years. The other partner has just released the first batch of fish fry this year, so it is expected to start production in the second half of the year. If everything goes smoothly, the proportion of Luyu fish we produce ourselves will gradually increase to 80% within a reasonable time. We are also developing the third and fourth partners synchronously to try to cover the remaining 20%. In the process of gradually increasing the production of perch, we hope to also improve its quality. We use technology and data to cultivate safer and higher quality perch. First, we will start with the fish fry and reduce the morbidity rate to increase the survival rate. After obtaining good fish fry, we hope to develop better functional feed, controlling indicators such as size and meat quality of perch.

5. In terms of information systems, we will continue to focus on customer experience and efficiency improvement. After two years of system construction, the application modules of the front-end are basically independently developed by ourselves. After mastering data and traffic entry, the current focus is to gradually transform third-party data into our own. In the process of accumulatlng data, we try to apply it. Taking our own membership system as an example, through a series of activities that increase fans' stickiness, the number of members in our system has accumulated to more than 6 million. Although there is still a long way to go compared to the number of WeChat public account fans, the number of members is more valuable. Compared with industry benchmarks, our IT system still has a lot of room for improvement, so we need to continue to invest in customer experience and efficiency improvement and iterate while using them.

6. Situation of several major brands: Tai Er Sour Fish has transformed from a popular internet food to a national sour fish brand. The original internet celebrity attribute can help us open up the market, and improve brand awareness at a cracking speed, but it ultimately depends on a good store model, operation management system, and supply chain to return to a normal business level. In the first four years of creating the Tan Er brand, we basically subtracted and emphasized brand tonality, making the brand sharper and more conducive to market segmentation. After the company went public, we can do some addition, and the epidemic came just after going public, so we took the opportunity to do some down-to-earth things. For example, increasing takeout, offering promotions in some cities, adding 6-person tables in sinking markets, and launching the Tan Er tea library in some places, providing fans with richer dining scenes and more reasons for repeat consumption.

For Suan La Guo, there are currently a total of 13 stores, mainly located in South China and East China. The performance of South China stores is good, while that of East China stores is greatly affected by the epidemic. The business model is gradually solidified, we need to iterate dishes, optimize the supply chain, and build operating systems and training systems in sync. For Jiu Mao Jiu Northwest Cuisine, the team members are adjusting the model while doing their best to win back lost customers, and their cost control has also been good, so the data is indeed slowly recovering. As for Naimore Grilled Fish, it is in a stage of polishing its product, similar to the situation during the last annual report conference.

1. Financial situation: The overall revenue in the first half of the year was 1.9 billion, a decrease of 6.1% compared to 2021. The net profit in the first half of the year was 63 million, and the net profit rate was 3.3%.

The revenue of Jiu Mao Jiu in the first half of the year was about 310 million, a decrease of 18.2% compared to the same period last year, affected by the epidemic and a decrease in stores. Although the revenue of Jiu Mao Jiu has decreased year-on-year, the operating profit of its stores has increased by 23.3% year-on-year, and the operating profit rate of the stores has also continued to improve. Even if the group expenses are included in the allocation, the Jiu Mao Jiu brand is still profitable. In the first half of the year, more than 60% of Tai'er's stores were affected by the ban on dining-in or closures, resulting in a decline in brand revenue. The operating profit at the store level also dropped by about 35% compared to the same period last year, and the store operating profit margin decreased to 16%. The brand's overall revenue also declined by 7.3% compared to the same period last year, to less than 1.5 billion. The speed of store openings for Tandualso slowed down due to the epidemic.

The average customer spending for both 9.9 and Tandu decreased by 1 yuan compared to the same period last year, due to the low consumption sentiment of consumers during the epidemic. On the other hand, we have made some adjustments to some dishes, launched some highly cost-effective ones, and attracted customers to consume. And as Tandu's stores continue to expand, the customer base will also be lowered.

In terms of operating expenses, the proportion of raw material and consumables costs to revenue in the first half of this year dropped to 35% compared to the same period last year, mainly due to the decline in procurement prices for raw materials. Affected by the epidemic, revenue decreased in the first half of this year, and the proportion of employee costs and rental costs to revenue increased. In terms of turnover days, the inventory turnover days for the first half of this year increased to 20.2 days. The main reason was that the consumption of inventory slowed down due to the adverse impact of the epidemic. The payable turnover days for the first half of the year also increased to 38 days, mainly because some suppliers were unable to settle accounts or make invoices on time due to the epidemic in many places.

Regarding cash flow, we still have a strong cash flow to meet the needs of operations and capital expenditures. The net cash inflow from operating activities in the first half of this year is about 350 million yuan, accounting for 18.5% of revenue, which has been relatively stable for many years. Our capital expenditures are mainly used for store openings and supply chain investments. The capital expenditure in the first half of this year was 120 million yuan, accounting for 6.5% of revenue, mainly due to the slowdown in store openings due to the epidemic.

Q&A with Dolphin Analyst

Q: The operating profit margin of 9.9 stores has increased in the first half of the year. What is the source of this increase? What are the future plans for Dolphin?

A: 1) After continuous iteration of product branding, customers have seen improvements in product experience. We are also consciously adjusting the products and eliminating complex production processes, merging the two kitchens (Chinese cuisine/noodle bar) together, reducing the number of kitchen staff and the area, and improving efficiency. In addition, we have increased Northern elements in our products while coordinating and optimizing the kitchen positions. Therefore, 9.9's profits have slowly accumulated. 2) Before we are recognized by the market, we won't think too much and will focus on doing one thing well.

Q: The guide for store openings has been adjusted. What is the plan for this adjustment? Have there been any optimizations or configurations in terms of personnel? Have the single-store models for 9.9, Senghui, and Tandu changed compared to the end of last year?

A: 1) The decline in Tai'er's store opening guidelines is mainly due to epidemic control, which resulted in unfinished planned openings in the first half of the year. There is no need to open stores in the second half of the year in a rush because it will compress business negotiations time, increase operating risks, and low-quality decoration. Store manpower can also be difficult to arrange. 2) Longbridge has been continuously optimizing and adjusting its staffing, with the number of employees decreasing from 40 to around 27-28. I believe Longbridge's team execution is not an issue. 3) Longbridge's single-store model has been on a positive trajectory, but its horizontal comparison is not ideal. However, Longbridge's development focus still lies on improving its horizontal comparison. Longbridge has been continuously developing its presence in the down-market over the past two to three years, which has been successful as the impact of the epidemic has been minimal in low-tier cities. Despite this, we have consciously increased our proportion of down-market development.

Q: As a hotpot restaurant, what are your requirements for atmosphere and freshness, and how does Longbridge's rate of repeated customers perform? What arrangements have been made regarding the supply chain?

A: 1) Regardless of Longbridge, Taneer, or Song, we all offer full meals. Regarding the frequency of repeat customers or consumption frequency for full meals, it cannot be directly compared to fast food or snacks. Loyal fans of full meal brands usually only eat once a month because it's an opportunity to improve their tastes and socialize. However, full meals are also repeatable. We need to target our core target group, especially the young consumers in shopping malls, who are opinion leaders and have a very positive impact on brand communication. 2) In terms of supply chain, Taneer needs to participate deeply in upstream procurement to ensure food safety, while for Longbridge, the material supply chain for the hot pot industry is readily available. Rather, we need to select and choose products instead of creating raw materials ourselves.

Q: Will Tae'er's pickled fish dish develop towards the retail end? Will the number of stores opening for Song be increased this year?

A: 1) In terms of development scale, the most important thing at this stage is opening stores. Once the scale is established, we will consider retail and pre-fabricated dishes. 2) In terms of opening stores, we will consider some new points for Song at the beginning of the year and further discuss them. We found that many landlords are very interested in Song, so we can basically enter the places that we want to enter, and the conditions are very good. In addition, with Taneer paving the way for us, we can understand the customer flow situation in malls. Taneer's reduction in store opening targets can also free up some staff to be transferred to Song.

Q: Can you quantify the degree of adjustment for dishes and product updates in the second half year? What is the outlook for gross profit margin in the second half of the year?

A: 1) We have been doing down-to-earth things, consciously lowering the price of dishes. As our own profit margin is not low, we are willing to deliver value to customers in a cost-effective manner and then pass the benefits on to employees in wages. The company only needs to maintain a normal profit margin and adhere to market-driven strategies. 2) We have performed well in terms of gross profit margin, and have not yet experienced major pressure in terms of food costs. Looking to the future, we expect food costs to have a declining trend, as well as rent, while labor costs may slowly rise, maintaining a steady overall profit margin for store operations. A: 1) We plan to try out dining scenarios at transportation hubs and community stores, as Tai'er is transitioning from an online celebrity brand to a national sour soup fish brand, and needs to continuously cater to more groups and dining scenes. 2) Tai'er is continually expanding nationwide and collaborating with businesses like Tanei on storefront resources. Tanei has no competitors in the industry, and hot pot is the widest but also the most fiercely competitive arena in Chinese cuisine. Therefore, Tai'er may not necessarily follow Tanei's routines and needs to constantly explore.

**Q: **Tai'er has lowered its store openings from 150 to 120. Is this due to poor property conditions or because customer traffic did not meet expectations? Will Tai'er continue to rapidly develop the southern region or focus on optimizing development in other regions in the short term?

A: 1) The pace at which Tanei and Tai'er open stores is not a hard and fast plan, just a matter of a few months early or late. During the epidemic, we focus on the best performing markets. We will pay more attention to the quality of growth rather than quantity. If the rental cost is high, we will not open a store. This is a matter of pace. 2) Tai'er has yet to come to a conclusion. The management radius in the southern region is small, so we will focus on the southern market but also consider the national market, but we will not take steps as large as Tanei's.

**Q: **Are there any cost-cutting measures the company is implementing to improve efficiency?

A: The epidemic has lasted for two or three years now, and most of the measures have already been implemented. We need to control the pace of store openings and develop at a healthy and reasonable pace. We will continue to strictly control the rental level and reduce operating leverage. We will also open stores where the epidemic has less of an impact and adjust the number of store personnel as needed. We will penetrate upstream into core raw materials when appropriate and suspend unnecessary expenses such as employee travel.

**Q: **Are there any plans to create new brands?

A: Under the epidemic, there is not a strong desire to create new brands in the market. Although we have new ideas, we will prioritize the development of Tanei in the next few years, as it is the support point and cornerstone of our group business. We do not want to distribute resources and energy.

Risk Disclosure and Statement for this article can be found at: Dolphin Analyst Disclaimer and General Disclosure