Summary in Plain Language
Guoquan currently has impressive visible results: nearly 4 billion yuan in revenue in half a year, double-digit profit growth, and over 12,000 stores, making it a true giant in the community retail sector. However, its stock price has dropped by more than 50% this year, falling by 80% from its historical high, creating an unusual situation where performance is improving while the stock price is declining. The fundamental reason is that Guoquan’s old growth strategy, which relied on the pandemic for rapid expansion, has hit a ceiling. After reaching 10,000 stores, it can no longer rely on new openings to sustain its performance. Yet, the company has failed to present a convincing new growth plan to investors. Instead, it has faced a series of issues such as inflated profits, deteriorating cash flow, the controlling shareholder selling off shares for cash, and even allegedly supporting a heavily indebted liquor company with its own funds, leading to a dilemma where the “old story” is over and no new one is in sight, with explosive growth seemingly out of reach.
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Detailed Analysis
1. The Counterintuitive Paradox: Rising Performance, Falling Stock Price
Many people assume that when a company’s revenue and profit both increase, its stock price should rise. However, investors are interested in future growth potential, not just current financial figures. Guoquan’s story used to be appealing: with so many residential areas in China and only a few thousand stores, there was potential for tens of thousands of new stores, each generating profits for the company. Now that there are 12,000 stores and almost all accessible community locations are covered, there’s no room for further expansion. The company claims it will grow by selling more products and increasing profits from existing stores, but without concrete evidence, this isn’t convincing to investors. It’s like someone who used to improve by 10 places in every exam and was once considered a top student, but now ranks 20th and can no longer improve quickly. When they say they’ll focus on competitions, without even proving they can do well in them, their valuation naturally drops significantly.
2. Hidden Issues in the Financial Reports
Several details in Guoquan’s financial reports indicate underlying problems:
- Revenue Growth Without Profit Growth: Revenue increased by 21.8%, but profit only by 12%, meaning for every additional 1 million yuan in sales, the company only made an extra 120,000 yuan in profit. This is because the company introduced low-margin products like durian and baked goods to boost sales, lowering overall profitability. To maintain growth, more money is spent on marketing and promotions, which are more expensive than before. Additionally, the cash flow from operations has decreased significantly, indicating that the company is spending more than it earns.
3. The Myth of 10,000 Stores
The rapid expansion of Guoquan was largely due to the pandemic. In 2020, it had just over 1,000 stores and grew to over 9,000 in three years, opening about seven to eight stores a day. This was possible because people couldn’t go out to eat and cooking hot pot at home became a necessity. Now that restrictions have eased, people prefer to eat out, and Guoquan’s per-store revenue has dropped from a peak of 700,000 yuan in 2022 to just over 500,000 yuan. Growth now relies on new stores, but the revenue from existing stores is only growing by 7%, which is not enough to sustain the company. The company has had to cut its expansion targets in half, recognizing that this path is unsustainable.
4. Lack of a Clear Growth Plan
Guoquan’s proposed new strategies, such as expanding store sizes and adding more products, lack credibility. Few stores are actually profitable, and franchisees face higher costs for renovations and inventory, prolonging their payback periods. Plans to open stores in Hong Kong and for camping are insignificant compared to the company’s overall revenue. Moreover, the company’s owner, Yang Mingchao, sold off shares for over 400 million yuan at the peak of the stock price in April and used the money to acquire a heavily indebted liquor company, potentially using Guoquan’s funds to cover the company’s debts. This raises concerns among investors about the company misappropriating its resources.
In summary, Guoquan’s apparent success is masking underlying issues, and its stock price reflects a lack of credible growth plans and poor operational efficiency. The company’s growth strategy is no longer viable, and investors are skeptical about its future prospects.