Maintain BUY. We project Tuhu’s 2H24E adjusted net profit to fall 9% YoY and 32% HoH to about RMB243mn, as sales in 3Q24 could be weaker than market expectation. That has probably delayed some new store openings. On the other hand, we expect Tuhu’s FY25E revenue to grow faster than FY24E, aided by new stores opened in 4Q24 and more support to stores to lure consumers and new franchised stores. The price cut in 2H24 has made Tuhu more cautious in procurement negotiation for 2025, which could help it lift GPM in FY25, in our view. We believe Tuhu is still more resilient than most auto after-market service providers amid economic uncertainties.
　　2H24E net profit to fall amid lower GPM. We expect Tuhu’s 2H24Erevenue to rise 8% YoY and 7% HoH to about RMB7.6bn, as total store number may rise more than 900 in FY24 to almost 6,900 at the end of 2024.
　　We project 2H24E gross margin to fall 1.5ppts HoH and 0.7ppts YoY to 24.4% due to tire products’ price cuts to withstand weak consumption in 3Q24. Meanwhile, we estimate selling expense ratio (as % of revenue) to rise 1.1ppts HoH to 13.8% in 2H24E to increase customer flow. Yet, we still expect total operating expense ratio in FY24E to narrow by 0.4ppts YoY.
　　Accordingly, we expect Tuhu’s 2H24 adjusted net profit (excluding share- based payment) to fall 9% YoY to about RMB243mn, or FY24E adjusted net profit of RMB601mn (+25% YoY).
　　Margins to recover in FY25E. We expect Tuhu’s revenue growth to accelerate again at 13% YoY in FY25E, especially with new stores opened 4Q24 and more support to stores. We project gross margin to improve from 25.1% in FY24E to 25.7% in FY25E, given lower procurement costs and higher sales portions from the high-margin exclusive and private-label products. We are of the view that Tuhu may still need to maintain a high selling expense ratio in FY25E, as the company may need to invest more in new media advertising to attract customers in lower-tier cities. Therefore, we project Tuhu’s adjusted net profit to rise 27% YoY to RMB763mn in FY25E, with a net margin of 4.6% (+0.5ppts YoY).
　　Valuation. We maintain our BUY rating but cut target price from HK$26.00 to HK$20.00, based on 20x (prior 17x) our revised adjusted FY25E EPS. We believe a higher P/E multiple could be justified given its proven capabilities to achieve more resilient earnings than peers amid consumption downgrade.
　　There is still a discount against the valuation multiples for its US peers O’Reilly (ORLY US, NR) and Advance Auto Parts (AAP US, NR) of about 30x. Key risks include slower network expansion, lower revenue and/or margins than we expect, as well as a sector de-rating.