EB SECURITIES: Snack retail industry leading scale advantage highlighted, focusing on recommending Fujian Wanchen Food Group (300972.SZ) and others.

EB SECURITIES released a research report stating that the snack retail industry has experienced rapid development in recent years, forming a dual strong structure of "Busy Ming" and "Wanchen" systems. The top systems have prominent scale advantages, strong bargaining power in the upstream procurement end, and more mature store models in the downstream joining end. They are also at the forefront of exploring new business formats, bringing growth support to both the revenue and profit ends. The report recommends the top systems BUSYMING (01768) and Fujian Wanchen Food Group (300972.SZ) in the snack retail industry. Key points from EB SECURITIES: Discount retail industry: The format itself has the attribute of crossing cycles, but the company might not be able to cross cycles Looking back at overseas markets such as Germany, the US, and Japan, discount retail formats typically emerge during economic downturns and have been stable to date, with a high market share in mature markets. The discount format itself has long-term attributes, but the companies may not. For example, in the US, dozens of discount retail brands were established in the mid-20th century, but most ceased operations in the 70s-90s, with only a few brands continuing operations to this day. Reasons for termination include insufficient operational competitiveness, blind expansion, and fluctuating positioning, which also indicates that enterprise scale is not a moat but a result of operations. Three issues of common concern about the Chinese snack discount retail format: 1) After years of rapid expansion, how much space is left for the snack retail format? 2) After top merchants finish "staking out territory" and enter the store model optimization stage, can the new expansion of categories effectively improve their supply chain efficiency? 3) What role does the supply chain play in discount retail, and what kind of model can achieve equilibrium with the upstream? This report answers these questions based on the physical conditions of the supply chain as a hard constraint from supply and demand perspectives. Market capacity calculation from a new perspective The bank combined the BUSYMING member's annual purchase frequency of 21 times and the purchase amount of 651 yuan, assuming that the purchase of snacks primarily meets household needs to calculate that the target market capacity of snack discounts is about 350 billion yuan. Based on BUSYMING's annual single store GMV of 5.19 million yuan in Q1-Q3, the total number of stores this format can accommodate is about 67,000. Considering that the eventual stability of stores is determined by market capacity/competition structure/logistics distribution hard constraints, the bank conducted sensitivity calculations based on BUSYMING's transportation logistics costs and daily sales performance. If only homogenization is used to increase store density, the scale economy of the bulk system is currently basically in the optimal range. Improving single-store revenue is the core means within the existing logistic system. Industry upgrade path: Expand categories to increase revenue, own brands to boost profits 1) The value of expanding categories lies in increasing the target market capacity and attempting to obtain higher gross profit margins. Given that the discount snack format in China already occupies the excellent flow product category of food and advocates a concept of joyful shopping provided by brands, it is reasonable to choose to expand categories to include high-margin products in normal temperature such as daily chemicals, stationery, and trendy playthings. 2) The greatest value of building own brands lies in stabilizing and enhancing the company's overall gross profit margin level. The successful establishment of own brands requires maturity in scale/supply chain capabilities/customer trust before it is feasible. Pricing logic: Share logic sets the income ceiling, net profit space is seen from the perspective of expanding categories The concentration of steady-state markets differs for different formats, with the huge difference in market share of the leading players depending on the sales radius that a single store can cover. That is, the longer the coverage radius, the higher the market share ceiling. The bank estimates that in the next 3-5 years, the market share of the top brands in the snack retail industry will be between 10%-40%, with a GMV income scale of about 75-105 billion yuan, and the number of stores is just a result of operations. In terms of profitability, the extent to which the gross profit margin can be improved is crucial. It is expected that the core driver of overall gross profit margin improvement will be the increased proportion of "customized products and own brand products" with higher gross profit margins. Risk analysis: Risk of intensified market competition, risk of fluctuations in raw material costs, risk of food safety issues.