Helen Motors: Refine and optimize, focus on sinking market.

Summary of Helen's 2022H1 performance conference call:

Time: 2022/8/29 10:30-11:30

Guests: CEO Ms. Lei Xing; CFO Ms. Yu Zhen; Marketing Director Mr. Chen Chiyuen; Capital Management Director Ms. Zhang Qiong

Key Points:

1. Development strategy "from pursuing speed to pursuing profit," adopting a "close-turn-combine-open" structural adjustment mode: Close- Close the improperly located stores in 2021; Turn- Transition from pure direct sales to a cooperative franchise model; Combine- Iteratively renovate old and dilapidated small stores, relocate them to better locations, and open one larger store nearby; Open- Launch a new county model in 2022, and continue to drive it in the future.

2. "Helen's Law" new model focuses on the county market, and the cooperative franchise model helps to improve profitability, which will be promoted to regular stores.

3. There is expected to be a significant rebound in 2022Q4.

Management Discussion and Analysis

CFO - Ms. Yu Zhen

[1] 2022H1 Overall Review

1. Difficulties

In 2022H1, due to the repeated outbreaks of the epidemic, a weak economic environment, and a decrease in consumer enthusiasm, operations were more difficult.

Among them, because the epidemic is constantly changing in many regions, Helen's stores are laid out nationwide, so stores are constantly opening and closing. Overall, the impact of the epidemic in 2022H1 is greater than that in 2022, about 60% (4 or 500) of stores cannot operate normally, and the overall normal opening time is only 70%. However, considering the impact of opening and closing and the recovery stage, the actual impact on normal operations time was relatively short.

2. Adjustment

The epidemic provided an opportunity to review the development model of recent years. The company made corresponding modifications to reconstruct the development model, adjust the internal structure, iteratively create the environment, and accelerate product development.

Among them, the structural adjustment is "close-turn-combine-open":

Close- Close the improperly located stores in 2021;

Turn- Transition from pure direct sales to a cooperative franchise model;

Combine- Iteratively renovate old and dilapidated small stores, relocate them to better locations, and open one larger store nearby;

Open- Launch a new county model in 2022, and continue to drive it in the future.

[2] Performance and Outlook

1. Income

Although the epidemic had a significant impact, the income in 2022H1 increased slightly year-on-year. Without the impact of the epidemic, income growth would be faster.

2. Cost

(1) 2022H1: The gross profit declined year-on-year, mainly due to large-scale drain activities conducted nationwide in May and June (buy one get one free in May, and 50% off the second cup in June), and the cost of giveaways increased. The normal cost of giveaways in 2021 accounted for about 4% of revenue, and the cost of giveaways in 2022H1 increased to about 7%. The cost of giveaways increased by about 3%, exactly corresponding to the decline in gross profit by 2-3%. (2) 2022H2:

• Due to the repeated outbreak of the epidemic, the accuracy and differentiation of the gift-giving activities will be further improved, thereby improving the efficiency of the gift-giving activities. For example, focus on delivering gifts where competing brands are densely distributed.

• Starting from the end of 2021, cost reduction and efficiency enhancement have been initiated, focusing on cost control and achieving significant results. The cost optimization in 2022H2 will focus on gross profit.

• In 2022H1, there is not much pressure on the pure purchase unit price, especially as negotiations on annual purchase framework with third-party brands have resumed, so there is still room for decline.

1. Self-owned Products

(1) 2022H1: Self-owned products, due to their low cost, are the main products for marketing activities, and their revenue has decreased in proportion to gross profit. In 2022H1, the development of self-owned products mainly focuses on snack products, and the proportion of snack revenue has increased by 1.5%. Downward products such as lemon pickled chicken feet, spicy small potatoes, etc. have been quite successful, validating the decision to develop snacks in the direction of wine.

(2) 2022H2: Currently, the speed of new snack product development is faster, but the development of wine is lagging behind, so R&D in H2 will tilt towards the wine segment.

• Dig deeper into drinkable wine. For example, passion fruit draft beer, which sells well in the Lichuan store, will be launched in all stores by the end of September, and other flavors will also be developed and launched.

• Mix and match wine products. For example, the rose barrel (mixed fruit beer and Red Bull), has good sales due to its beautiful color and innovative taste.

1. Profit

Due to the large cost of (rent and labor) and the limited revenue growth rate, operational losses were confirmed in 2022H1. Since 2021, refined operations have been initiated to reduce costs and improve efficiency. The cost management effect in 2022H1 is good, the number of stores has almost doubled, and the control of losses is well. The number of bars has increased by 80% compared with the same period last year. Due to measures such as optimizing personnel structure (from 13 people/store to 9 people/store), labor costs, rent, and other office expenses are much lower than the growth of stores. At the same time, the company's promotion is more accurate and the cost is smaller, and customers recognize the value of the brand.

There is not much room for future cost reduction, and the focus will be on refining cost management to obtain high customer recognition at low cost.

1. Performance of Single and Same Store

(1) Single Store

• The company belongs to the offline-intensive activity management, which is more strictly controlled than pure restaurants. The overall daily customer volume has decreased by 40%, mainly due to the decrease in customer flow. The average customer unit price has decreased by about 5%, mainly due to the impact of promotions.

• First-tier cities are the hardest hit areas of the epidemic this year, but cities with better normalized prevention and control (such as Shenzhen) have better results, with an average daily sales of 9,000 yuan.

• The second-tier cities (Tianjin, Hangzhou, Nanjing) have a relatively high proportion of university stores, and there were more university closures in the second half of 2022H1. The flow of students decreased, and the recovery in 2022H2 mainly depends on the direction of policy. Newly opened stores in the second-tier cities (opened between 2021 and 2022) account for a relatively high proportion, around 70%, and the environment in 2022H1 was poor. The data in new stores was not ideal, which dragged down the average level. The company has adjusted the short-term cash flow consumption and closed stores with pessimistic recovery prospects.

• The competition among peers in second-tier cities is fierce, and they face the situation where peers divert customers. This is mainly due to some stores being located in corners and after setting off the commercial district, peers choose to open stores in places with more obvious traffic, which to some extent diverts the company's customers. In the first half of the year, when the company was expanding rapidly, neglecting user experience, peers launched strategies against it, which caused short-term impacts. The company began to gradually counteract from May (environment iteration, rich social functions, etc.).

• Same-store sales impact is similar to the above. Last November, the company realized that the site selection research was not sufficient, and site selection was more cautious. Data show that the daily sales from November last year to now reached around 8000, which is higher than the overall average, relative to 20% higher than the store selection in 2021H1.

Chief executive officer - Ms. Lei Xing

[1] Challenges and Opportunities

This loss is the second loss the company has experienced since its establishment in 2009, which has caused a great shock within the company. The company has conducted retrospective reflection and strategic adjustments.

1. County market

A significant challenge for the company in 2022 is both internal and external (epidemic disturbances and strict epidemic prevention policies). However, the country encourages the development of the night economy and county economy. The company can sink to the county level, where it can spread the epidemic risk and operate about 2 stores in 1 county market, which can well spread the epidemic prevention and control risk compared to opening shops intensively in high-line cities.

2。Peer competition

As the company's popularity increases, regional peers enter, choose better locations, and cause diversion. At the same time, they take advantage of county markets that the company has not yet entered. However, peers co-build the night economy ecosystem with the company, bringing young people from online to offline, which is a good thing for the entire industry. The company has no national competitors, but there is a regional diversion effect. The company should not wait for peers to iterate, but should iterate on its aging stores and improve the locations of less ideal stores.

1. Store situation

Affected by the epidemic in 2021H1, the store opening speed was relatively fast in 2021H2, and the peak period reached a speed of 80 stores/month, with the ability to open 1000 stores within a year. However, the company's rapid expansion has faced problems (inaccurate site selection, too dense store distribution in a few regions resulting in internal competition). It will be more cautious in the future, close down the stores with site selection mistakes, and focus on sinking markets.

However, with the opening of more than 400 stores in 2021 and accumulated site selection samples (first-line, second-line and deeper markets), there is sufficient optimization of the site selection model for both encryption and new markets.

1. Personnel reserves

The rapid opening of stores in 2021 resulted in excessive personnel reserves, and overhasty growth.

However, the rapid development in 2021 has cultivated many outstanding talents. At present, there are more than 100 reserve district managers and each district manager can manage 10-15 stores in the future, i.e., 1500-2000 stores. With the improvement of digital capabilities, more stores can be managed by each district manager. Future personnel optimization and higher selection standards will be implemented. 【2】Development Strategy

Based on reflection, the company adjusted its development strategy - shifting from pursuing speed to pursuing profit.

1. "Helen's·Yue" New Model

On May 19th of this year, a new "Helen's·Yue" store was opened, mainly aimed at county-level markets.

The innovation lies in:

(1) Changing from a direct sales model to a cooperative franchise model to better integrate local social resources for co-creation and sharing;

(2) Increasing barbecue items and changing the name to "Street Stall" to expand the consumer group, lower the consumption threshold, and reduce the impact of the epidemic;

(3) Focusing on selecting good locations, shifting from previous corner shops to ground floor shops (which are not expensive in county-level markets). At the same time, upgrade and iterate the environment to create a landmark for local night-time consumption economy. According to research, there are currently more than 2,800 county-level markets in China, with a huge demand and potential for consumption.

1. Store Upgrades

In response to increasing competition, the company will upgrade older small stores while also closing down stores that are over-encrypted, located in the wrong areas, or have excessively long training periods (totaling over 100 stores).

1. Staff Optimization

During the peak in 2021, there were over 10,000 employees. As of 2022, there are now fewer than 8,000 employees due to optimizing staff through lowering costs and increasing efficiency.

1. Customers

In the future, the company will still adhere to the principle of "customer-centric and employee-oriented", creating value for customers.

(1) Adhere to the social positioning and continue to carry out social activities.

(2) Undertake social responsibilities and engage in public welfare activities.

(3) Focus on developing alcohol-based products and share them through social interaction. We can expect to launch popular products similar to the "Coke barrel".

(4) Continuously invest in digital construction to enhance the customer experience.

"Sea Tangle Touch" has already been fully piloted in Wuhan, and has launched social mini-programs and music mini-programs that support on-site and off-site table sharing. Some stores have also piloted large-screen interactive features such as declarations of love and birthday wishes.

1. Partner Cooperation

(1) Incentive Measures

• Part of the reason for the two previous losses was due to a large amount of equity incentive, but this is worth continued investment.

• Open up external suppliers with resources and internal partners to join. Internal partner cooperation helps to stimulate co-creation and sharing, as well as increase business awareness. In 2022, we will shift from a family culture to a professional culture, attaching performance evaluations to incentive employees.

(2) Innovation

Establish a special innovation group to stimulate bottom-up innovation.

(3) Intelligent Digital Construction

• Continuously invest in intelligent digital construction to improve management level and reduce workload.

• Over 100 smart stores have been deployed, and by the end of this year, all stores will be equipped and online. This can monitor whether store items are made in a timely manner, whether service efficiency is high, whether kitchen operations are standardized, and whether fire hazards exist.

Overall, in 2021, the company now has the ability to open 1,000 stores in a year. In 2022H1, based on changes in the external situation and problems brought about by rapid development, the new model will be refined and development strategy will be adjusted. Due to the uncertain epidemic situation in 2022H2, opening stores and encryption in first- and second-tier cities will be more cautious, and more focus will be placed on expanding new models in downstream markets to verify development potential. ** At the same time, through digital and intelligent means, we aim to improve customer experience, iterate on our enterprise culture, and enhance our partners' business awareness and subjectivity. Although external uncertainties still exist in the future, considering sufficient cash flow, an excellent team, and a vast customer base, we believe there is huge market development potential.

Q&A

Q: Market competition landscape and future prospects for 2022H1

A:

【1】Market competition landscape for 2022H1

1. Competition trends: There is a differentiation trend in the tavern industry's competition.

(1) Competition among middle and lower-tier friendly businesses has weakened, while competition among top-tier friendly businesses has strengthened.

(2) Taverns without independent brands or chains have suffered more severely, while chains and taverns with independent brands have remained relatively stable.

(3) The momentum of some emerging brands in some regions is fierce.

The pace of opening that friendly businesses around 2020 has slowed down and gradually fell to a flattening stage. This is mainly because customer traffic has been severely affected by the overall environment. Emerging friendly businesses that appeared in 2021 and beyond have maintained a relatively fast expansion speed, mainly concentrated in the Hubei and Hunan regions. However, due to their small size, they have not yet had a particularly significant impact.

1. Competition means: Price warfare is the main competition means among friendly businesses in the industry.

(1) Lock in a better business shop of the company, select a store with a larger external facade and better traffic. For example, if the company is on the 4th floor, they may choose the 2nd floor.

(2) A small number of friendly businesses have begun to try more complex competition means, such as campus promotions and innovative designs using their own products. The company has had similar practices, and friendly businesses are now imitating and upgrading their competition means on the level of price warfare.

【2】Future prospects

1. Industry outlook

(1) The tavern industry was in a relatively primitive and primary stage in the past. In the future, chain and brand development is definitely a long-term and inevitable trend, so the competition among top-tier tavern brands will not decrease.

(2) The individual taverns that occupy the largest market share are expected to be cleared due to the double squeeze of operating costs and customer flow, especially in areas severely affected by the epidemic.

1. Company outlook

The company retains a cautious and optimistic attitude towards future competition trends. We hope that friendly businesses can provide more differentiated value and cultivate the healthy growth of the Chinese tavern market together.

(1) The pressure of competitors forces the company to iterate more actively and seize the advantage in the competition.

They have made more active and bolder breakthroughs in product, decoration style, and social play. In the past, as the only explorer in the market, everything was groped by the company in the no-man's land. Now, the innovation of competitors can provide valuable reference, ending the past situation of greater uncertainty.

(2) The increase in friendly businesses represents the continuous improvement of the industry ecosystem, the growth of industry audiences and consumer awareness. As a leader in the industry with an absolute market share, the company benefits the most.

Q: The difference between Helen's Way and traditional Helen's mode and its overall performance

A:

【1】The difference between Helen's Way and traditional Helen's mode

1. More diverse products

• It has introduced large roadside stall product lines such as grilled skewers, cold dishes, and fresh beer. Barbecue has the function of pairing with alcohol, which has a positive impact on the increase in customers' alcohol consumption and the extension of consumption time.

====== output:

• Helen's Yue chooses locations that are different from Helen's. Helen's picks good locations but poor positions, while Helen's Yue prioritizes stores on the street, using outdoor placement and distinctive facades to attract local customers and expand the customer base.
  • The facades of the Lichuan and Jianli stores are very distinctive on the whole street, which enhances traffic.
  • Outdoor seating and facades make middle-aged people outside the store feel youthful and provide a relatively quiet and ventilated environment, so consumers of a slightly older age range prefer outdoor seating, indirectly expanding the customer base. Based on product and learning strategy optimization, expansion has also been achieved in terms of age and geographical coverage. Now, in addition to the youth group, it can cover the consumption needs of teenagers and middle-aged customers.
• Adjusting product selection and layout strategies can compete in more down-market county markets.
• The Dolphin has two main improvements:
  • (1) Thanks to bold and innovative design styles, compared to the regular Helen's store, the Dolphin has a very obvious improvement in decoration design and store atmosphere satisfaction.
  • (2) The strong local atmosphere in the county-level markets has enhanced the store atmosphere.
• The Dolphin performed better than Helen's in the following two aspects:
  • (1) Gender ratio: the Dolphin's gender ratio is more balanced than Helen's.
  • (2) Age distribution: wider. The group over 30 is rare in Helen's regular stores, but relatively large in the Dolphin's.
• The Dolphin's innovative products are iterated and updated to the existing Helen's taverns. For example, the popular passion fruit draught beer and barbecue in Lichuan will gradually be introduced to Helen's - starting at the end of September, 70-80 stores have started to sell barbecue. This complements each other, and the Dolphin is the pioneer. (2) Decoration: The old store will be replaced with Helen's new material mode.

(3) Model: The model of co-operation and joining can mobilize the advantages and operational enthusiasm of franchised partners, and thus improve the flexibility of operation and the profitability of the company.

• Advantages: For example, at the beginning of the opening of stores in county-level markets, if there are resources available locally, time and financial costs will be greatly reduced in terms of certification, site selection, and brand acceptance by locals.
• Operational Enthusiasm: In the past, the model of transferring old store managers to new stores with new store managers resulted in a weak sense of participation among store managers and insufficient emotional communication between customers and store employees. Currently, we are piloting the co-operation and joining model in Lichuan and Jianli, and because most of the store employees are locals, they also have a certain share of the store's profits, so they will maintain positive interaction with users.

\* There are more than 90 tables in Lichuan store, with monthly revenue surpassing 1 million yuan in July, and cash profit of about 45%. In August, revenue was 1.06 million yuan, with daily revenue of more than 30,000 yuan and table revenue of more than 400 yuan. Of course, Lichuan is the first store and needs further verification in more stores.

\* Jianli has a smaller area and no outdoor seating, with more than 300 square meters and 40 to 50 tables. However, the daily revenue is more than 10,000 yuan, and weekend revenue is nearly 20,000 yuan, with table revenue of more than 300 yuan.

5. Cooperation and joining model

(1) The co-operation and joining model will be applied to existing Helens. Some stores will be converted to the co-operation model, but more will be given to front-line operating partners to mobilize enthusiasm.

(2) No brand franchise fee will be charged to franchisees. Afterward, a certain percentage of management fees will be charged according to income. The distribution is in a stepped manner, ranging from 0-3, 40%, and the proportional commission rates corresponding to different intervals are different. The calculation logic is based on the expected profit of the store to calculate the expected franchise fee, and then reverse calculate the proportion of income. As the investment in the early stage of the store and the later operation are under strict control and management, the overall profit sharing of the company is not low. For example, Lichuan's cash profit margin is 45%. If the ratio is 70% or more, it is nearly 30% cash profit margin, which is better than the current pure direct-sales model.

(3) Joint selection of location with franchisee in the early stage. Local recommendations help the company select the best places for customer traffic, and also help to review whether the storefronts meet the company's location selection criteria.

(4) Mainly a strong management model, the company manages daily operations, and does not relax standardization, materials, tables and chairs, computer systems and other standardizations. Franchisees are more diversified in their daily operations.

Franchisees are responsible for handling the store's business license, operating license, and food license in the form of individual businesses, as well as signing leases and hardening the store. The company, as a brand party, provides decorative materials and hardware equipment that meet the decoration standards.

Q: 2022H1 Store situation and 2022 opening pace

A:

[1] 2022H1 store situation

1. Overview As of August 21, nearly 150 new stores were opened, about 109 stores were closed, and there are 821 stores in operation. When issuing a profit warning, it was mentioned that the company had already made provisions for the closed and expected-to-be-closed stores (a one-time loss of about 90-110 million yuan), which corresponds to about 120-130 stores. As of August 29, most of the stores within the scope have completed their closures, and the breakeven point has been lowered in the short term. It may be difficult for some places to achieve short-term recovery in passenger flow.

2. Types of Store Closures

(1) Decrease in Commercial District Traffic: Under the real estate environment this year, some commercial districts are experiencing their own operational difficulties, affecting store traffic. The company timely closed stores without passenger flow to reduce losses.

(2) Site Selection Mistakes: Insufficient research and hasty site selection resulted in some wastage of subsequent investment.

(3) Short-term Loss Prevention: Generally, stores will be added near university towns, but due to the uncertain situations of the 2022 H1 lockdown and H2, more funds and manpower will be invested in short-term loss prevention of current key businesses. Stores that may take about a year to turn around will be abandoned to avoid wasting too much cash flow.

1. Store Average Situation

Store closures were gradually completed from June to August, which is the off-season, so the rebound is not particularly significant. However, there has been a recent rebound in performance in the past week, so there should be a more significant rebound in Q4.

1. New Additions and Closures

There are still about 130 stores to date. If there is still no clarity on policies in 2022 H2 and passenger flow cannot recover, there may be a slight increase.

1. New Store Openings in 2022

The total number of new store openings for the year is about 300.

As of now, more than 150 new stores have opened, about 40-50 stores are under renovation and preparation for opening, and more than 200 stores are about to open or have signed contracts for renovation. Both county stores and iteration stores follow the Dolphin model. They are currently being signed for renovation one after another, and there may be dozens of stores if the progress is fast enough.

1. Own-Brand Products

The number of own-brand products has not decreased.

In 2022 H1, many giveaway activities were launched, and the company gave away its own products that were well-liked by customers and had low costs. The ratio of own-brand product giveaways was relatively high, but giveaways do not generate revenue, so the quantity of own-brand products decreased. If the product amount is restored, there is no decrease in own-brand products.

Risk Disclosure and Statement of This Article: Dolphin Analyst Disclaimer and General Disclosure