Nine Zero Nine: Priority on Product Iteration and Efficiency

The following is a summary of 2022 full-year performance meeting of Jiulongjiu. Detailed financial report reviews can be found in "Jiulongjiu: Multiple innovation in business, but operations still need improvement".

I. Key Highlights

Guidance:

• It is expected that the annual revenue of Tai Er acid fish will be about 10 million yuan per store, with an operating profit margin of 23%, an investment payback period of 10 months, and a break-even point of annual revenue of 6 million yuan.

• If Sǒng hot pot can achieve 300-500 stores, the annual revenue of a single store will be 20 million yuan, with a single store operating profit margin of 20%, an investment payback period of 10-12 months, and a break-even point of annual revenue of 12 million yuan.

• In 2023, Tai Er acid fish plans to open 120 stores (105 in China and 15 international), Sǒng hot pot will open 25 stores, and Jiulongjiu Northwest cuisine has no clear guidance.

II. Management Statements (2022 Business and Future Outlook)

1. Brands

（1）Tai Er acid fish: Plan to open 120 branches, actually opened 115. As of December 31, 2022, 102 have been opened, and 13 planned stores have been decorated but not opened due to the epidemic, which is not suitable for opening from the perspective of customers and employees. It is planned to open them in early 2023. In fact, they have already been opened around the Spring Festival and will not actually affect the 2022 or 2023 annual performance.

The 2023 plan for Tai Er acid fish to open stores is 120, but the structure will be different. The domestic business unit will account for 105 branches, and the international business unit will account for 15 branches. This is the first time the concept of an international business unit has been proposed. After all, consumption habits, population structure, and laws and regulations vary in each country and region. At present, the resources required to open the first store in new countries and regions are 5-10 times that of opening a domestic store, but after the first store is successfully opened, replicating the opening of other stores will be easier. Considering the level of economic development, exchange rates, etc., the revenue and profit of a single international store are equivalent to about 2-3 domestic stores.

（2）Sǒng hot pot: Plan to open 15 new stores in 2022, actually opened 18, which is related to the popularity and reputation of Sǒng hot pot.

The guidance for opening stores in 2023 is 25, because: 1) The actual number of stores opened in 2022 exceeded the plan, using up part of the manpower; 2) 25 is guidance and the final decision depends on the team and market opportunities; 3) Brand momentum is more important than store opening speed.

（3）Jiulongjiu Northwest cuisine: Close 7 stores in 2023, with a slight profit for the whole year. The team is meticulous and solid. In 2023, new stores will be opened and inefficient stores will be closed, with overall scale remaining stable, waiting for the recovery of consumption.

（4）Lai Meili grilled fish: There is no clear guidance for opening stores in 2023, but stores may be opened if there are special opportunities. 2. Group Strategy: Team, Supply Chain, Information System

(1) Team: In 2022, the group plans to recruit a group of highly educated young people and stabilize them to form a competitive advantage.

(2) Supply Chain

1) Core raw materials - especially lu fish farming and central kitchen layout

- Good parts of lu fish farming: ①The second partner has smoothly produced according to the plan, and capacity expansion is also in progress; ②The food safety of lu fish is in place and there have been no issues; ③The fry part has achieved independent research and development, and subsequent investment will be increased. Self-research and production of feed and animal health products will be done in order to streamline the chain; ④Efforts are being made to rear lu fish.

- Parts of lu fish farming that are not doing well: We have not successfully found suitable third or fourth partners, so the ratio of self-supplied lu fish has not increased (estimated to be about 40% currently). We will continue to look for new partners and try a brand new partnership model for lu fish farming. The general idea is to transition from heavy assets to light assets, and we will report on any substantial progress in the future.

2) Central kitchen construction

①The main structure of the Guangzhou national supply chain center has been topped out and is expected to be completed and put into production in the first half of 2024. ②In order to support and develop Sōng hotpot, we previously acquired land in Chongqing to build hotpot soup and composite seasoning factories. We are currently in the design and regulatory approval phase, and if everything goes smoothly, production will commence after two years, reaching a certain scale. ③We are actively deploying central kitchens in East China and North China, which are crucial in the chain restaurant industry.

(3) Information System

We have spent a year and a half building a self-developed system to solve problems with third-party platforms.

3. Main Brand Situation

(1) Tai Er Sour Fish: Iterating the experience, prioritizing efficiency.

We care about 3 issues:

1) Life cycle of sour fish category

In the early stages of 2014-2015, when the sour fish category was just emerging, the company capitalized on the opportunity to enter the market, opened the market through a single product strategy, and quickly established a high brand momentum with its brand identity and mature operational system. The four-year category dividend period saw various sour fish brands emerge, but Tai Er held the head brand position. After the category dividend period, when it was believed that 5-7 years of regional sour fish brands would coexist and obtain a competitive advantage through continuous operating ability. However, the epidemic accelerated the industry's consolidation, and three years later, Tai Er became the only head brand in the sour fish category.

Looking further ahead, it is judged that the sour fish category will enter a long-term stable state. After three years of the epidemic, we were able to secure good locations in shopping centers. Therefore, as long as we do not make mistakes, Tai Er Sour Fish's head position in the category will be stable for a longer period of time (expected to be more than 5 years).

If this assumption holds, future strategies will focus mainly on: ①As a head brand, expand the influence of the sour fish category's layout and make the race track wider. ②While deepening the moat, maintain more stable output in terms of product and experience, iterate with the market and consumer changes to maintain brand competitiveness. 2) Single-Store Model

After the pandemic and with economic recovery, it is estimated that a single-store of Tai’er restaurant will earn about 10 million yuan annually, with an operating profit margin of 23% and a payback period of 10 months. The break-even point is an annual income of 6 million yuan. It is predicted that the economic recovery will gradually improve in 2023. When preparing the budget, a possibility of resurgence of the pandemic should be reserved, but overall it is relatively certain.

3) Store Expansion Cap

The catering and consumer market changes too fast, and the final outcome is difficult to predict. However, there is confidence to gradually open 1,000 stores over the next few years.

In addition, Tai'er has been conducting a global survey, including commercial environment, market structure, customer base, experience processes, consumption patterns, employment models, legal regulations, etc. The initial plan is to fully utilize Tai'er products and models for expanding international business with confidence. Tai'er International is positioned as Chinese sauerkraut, so the first stage of development will focus on overseas Chinese gathering places, such as Southeast Asia, North America, East Asia, Oceania, and other regions dominated by Chinese customers. With a scope of about 150-200 stores, one international store is equivalent to revenue and profit of 2-3 domestic stores. After the international business and Tai'er brand have landed, exploring the possibility of local customer groups will be simultaneously pursued. According to current survey results, the potential of the local market is enormous and some Chinese food brands provide a good learning example. Each country and region represents a separate market and requires dedicated efforts. Although the early phase will consume substantial resources and energy, things are expected to ease up later with the successful landing of the first store.

(2) Songhuo Hotpot：Brand Positioning: “Everyone is Happy”

With 27 stores in 2022, Songhuo expanded from nine stores and 11 stores are headquarters located in Guangzhou, while the other 16 are located in cities outside of Guangzhou. Regarding store distribution, the first focus is consolidating in southern China with Guangzhou as the center, while also expanding to other parts of the country. The first batch of stores mainly consists of high-energy spots in high-energy cities with brand iteration over two years.

1) Good Products are the Foundation

Standardization of hotpot is extremely high, making it difficult to achieve differentiation. In the first two years, with no experience, the Songhuo team followed market trends. Additionally, the team quickly iterated their menu by seeking good ingredients, using fresh cut beef as an example of their success.

2) Good at Creating a Consuming Environment and Atmosphere

Songhuo's dancing culture is the most appealing aspect of its atmosphere and has garnered attention on Dianping and Xiaohongshu (social media apps). They will continue to invest in and deepen this aspect.

3) Single-Store Model

Upon reaching 300-500 stores, it is estimated that a single store will earn a revenue of 20 million yuan annually, with an operating profit margin of 20% and a payback period of 10-12 months. The break-even point is an annual income of 12 million yuan.

Factors to consider include: ①As a result of the pandemic, the data from Songhuo's first two years of operating reflect significant fluctuations. As for the future of hotpot competition, the team has a good understanding of the overall trend.②As the largest, best and most mature segment of the Chinese restaurant industry, competition is always the fiercest in the hotpot sector. The rational profit level for the industry in terms of net profit margins is around 8-10%; the team has sufficient capacity for sustainable operation and a strong confidence in outperforming their domestic peers. It is estimated that within five years, there will be about 300 to 500 new stores and corresponding single-store models for Songhuo, but there is still room for growth beyond these numbers. (3) Lai Meili Grilled Fish: Continuous Testing

Positioned as the grilled fish version of Tai'er, the core product of grilled fish has gone from mediocre to delicious, but we are still in the stage of making the product and not yet ready to open new stores. However, if we encounter good properties and conditions, Lai Meili will also choose to open some stores, considering using the store-opening process to iterate our products and brand.

Q&A Section

Q: The revenue of Tai'er single stores has dropped by about 10% or more compared to before the pandemic. Under the leverage of costs, the profit may fall even more severely. Can you further introduce the cost-reducing measures that Tai'er has taken since last year?

A: Firstly, the single-store revenue performance of Tai'er is normal. The main reasons for the decline are the following two points:

(1) The pandemic.

(2) The first 100 stores were located in top-quality malls with high rental and pedestrian traffic, and high table-turnover rate. In the process of continuing to open stores from first- and second-tier city core business circles to municipal and peripheral business circles, the overall demand intensity and pedestrian traffic of the mall will linearly decline. Therefore, it is reasonable for revenue to decline, and in fact, operating costs such as rent will decline faster.

So, this decline is normal, but we should have some differences in our approach when landing in different business districts. Tai'er is gradually making changes to provide a more rich dining scene to increase customer return visits. For example, in business districts with a higher proportion of family customers, we will appropriately increase 6-person tables.

Secondly, there is cost-reducing and efficiency-increasing concept and awareness in all aspects of the company's management. Cost-reducing and efficiency-increasing measures on the cost side can be summarized as the following five points:

(1) Restrain the pace of store opening, neither radical nor conservative, and develop and change at a healthy and reasonable speed. From a certain perspective, improving the success rate of store opening is the biggest saving.

(2) Continuously optimize the supply chain, deeply participating in the management of core strategic ingredients, and as far as possible reduce procurement costs while controlling food safety.

(3) Pay attention to the control of rental levels, reduce operating leverage, and try to avoid blindly introducing some high-rental locations.

(4) Based on the pedestrian traffic of the mall and the store, especially the pedestrian traffic during peak dining times, flexibly adjust the number of store employees to lower labor costs.

(5) Save some unnecessary expenses, such as the company's annual meeting and employee travel expenses.

Q: There is a certain difference in brand potential for Sōng huǒ guō in different regions, so for the expansion plan of the entire brand, does the company have any emphasis on the regional layout of store openings?

A: This phenomenon is normal. Tai'er also encountered similar situations during its development. Because southern China is the company's base camp, and Beijing, Shanghai, Guangzhou, and Shenzhen are also located in southern China, it is reasonable for Sōng huǒ guō to first establish its foothold in southern China when opening stores. Because hot pot is a highly competitive category, there are some good stock brands in every city and region, so the company does not want to eat everyone up, but wants to do a good job in product and experience, so as to be able to stand firmly in the hot pot track. Then on this basis, the company tries to make some differentiated measures on the brand side to increase recognition, and thus find the subdivision market that belongs to Sōng huǒ guō. Therefore, the company is not in a hurry to layout for Sǒng Hot Pot. Stores are opened in the order of Guangzhou and Shenzhen first, and then Shanghai and Beijing. Besides the high popularity, reputation and brand momentum in South China, the first store in Beijing also performed quite well. The four stores in Shanghai started off slowly, with no queues, but now they are steadily rising, all in line with the company's expectations. Being able to stand firm in Shanghai, the gateway to China's catering consumption, with all aspects of indicators steadily rising, has given the company a lot of confidence to continue its national layout in other places such as Nanchang.

Q: What is the current single-store model for Sǒng Hot Pot? What kind of revenue, profit margin, breakeven point, and other data can be expected for single-store models in 2023 and 2024?

A: Since Sǒng Hot Pot's business and data were very unstable before the release of the performance conference, the company did not give expectations for the future single-store model or store space for Sǒng Hot Pot until then.

Looking at the data obtained from the normal operation of each store for the two months after the epidemic was released, the data of each store is definitely much higher than the single-store model mentioned earlier. But, firstly, there are few stores; secondly, January and February are the small peak season for catering, and the product demand for entertaining and dining is relatively rich before and after the Spring Festival; thirdly, after more stores are opened, it is also necessary to expand outward and sink like Tàyì after laying out the first batch of top-level shopping malls and business circles. Currently, the company believes that Sǒng is still in a period of brand promotion and dividend from 2023 to 2024 and will gradually return to the mode of maintaining sustained competitiveness through product experience, cost-effectiveness, and other attributes like Tàyì.

Q: Why was Tàyì's profit margin slightly weaker in the second half of 2022 than in the first half? How to predict Tàyì's net profit in 2023?

A: (1) Because the market conditions and mall traffic in the second half of last year were worse than in the first half, the revenue side of the second half of last year should be weaker than that of the first half.

(2) For last year's semi-annual report data, the company judged that Tàyì's gross profit margin was relatively high. Although this was achieved through investment in the supply chain and cost savings in rent, the company believes that in an economic downturn and a poor atmosphere for large consumption, the emphasis should be on product experience and cost-effectiveness, returning the cost saved in the supply chain and rent to customers through cost-effectiveness.

(3) According to the data from the first two months of 2023, there is no problem with Tàyì's profitability. As long as the overall environment and mall traffic return to a relatively normal situation, Tàyì's profitability can be restored immediately. In the future, if we return to the track and logic of China's consumer upgrade before the epidemic, the entire catering and consumer market will rise in price every year. At that time, Tàyì will also follow up at the appropriate time.

Q: The operating profit margin of Jǐumáojiǔ Restaurant in the second half of 22 is actually slightly better than in the first half. What measures has the company taken?

A: In fact, Jǐumáojiǔ Northwestern cuisine has been upgrading and iterating on the product and brand for the past two years, but as an old brand of more than 20 years, its curve has been declining before these optimization and iteration measures take effect. This is because there will be a period of pain when planning to give the market and customers a new product experience and brand image, and many customers cannot accept it for a while. During the past two years, Jiutoine's northwest cuisine has slowly emerged from a low period, and its reputation and data are gradually improving, although it has not yet returned to pre-epidemic levels, the trend is still growing.

Q: Looking at the stable performance from Taier's one million RMB single-store sales and 23% restaurant operating profit rate. 23% is historically high, why are you confident that you can return to that level? Has cost structure optimization occurred in specific areas such as employee salaries or rent?

A: The stable single-store income after Taier was 10 million.

Gross margin and store-level profit margin: The gross margin of the supply chain has continuously improved, and investment in recent years has been reflected in financial statement data, but the main purpose is food safety and quality stability. The fluctuation of gross profit margin in the second half of 2022 is an active choice. In the past few decades, Chinese consumers have continued to upgrade their consumption as their disposable income increases year by year. Abandoning the increase in price to offset the "three highs and one low" (high raw materials, high labor costs, high rent, and low consumption demand) is the case in the catering industry and even the consumer sector. Gross margin can therefore follow the market. However, in the past two to three years, consumption has decreased due to the impact of the epidemic, and both the industry and disposable income have been affected. The company should return profits to customers while they have the ability and resources. Brand experience, value for money, and reputation are far more important than short-term profits. As long as the economy rebounds and consumption recovers and returns to normal, the gross margin of the entire catering and consumer industries will steadily increase. Taier has been around for more than 7 years, and the sample size is large enough. The cities and malls that need to be entered are known. Catering is nothing but raw materials, labor costs, and rent, and investment reflects depreciation, amortization, energy, etc. If the single-store revenue returns to 10 million RMB, the reasonable store profit margin is between 22-25%, taking the midpoint down to 23%.

Q: What gross profit margin corresponds to a 23% restaurant operating profit margin? What will be the gross profit margin in the second half of 2022?

A: The gross profit margin in the second half of 2022 will be 63%; when the restaurant operating profit margin is 23% in the future, the corresponding gross profit margin will be approximately 64%-65%.

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