Maintain BUY. Tuhu’s 2H24 earnings were largely in line with our expectation. We find that the profitability of Tuhu’s franchised stores has been better than most auto after-market peers’, as more than 90% of Tuhu’s stores operating for over six months made profits in FY24. Although it remains challenging for Tuhu to achieve a YoY increase in single-store revenue metrics amid macro uncertainties, we believe store number expansion could continue to drive revenue growth over the next few years. We are of the view that the company is poised to benefit from three key trends: growing vehicle ages, consumption downgrade and the shift toward online purchasing among younger consumers. n 2H24 GPM slightly better than our expectation. Tuhu’s 2H24 revenue rose 7% HoH to RMB7.6bn, in line with our prior forecast. Its 2H24 gross margin fell 1ppt HoH to 24.9%, higher than our forecast by 0.5ppts, mainly due to better margins from car wash and detailing businesses. Therefore, its 2H24 net profit fell 31% HoH to RMB198mn, higher than our prior forecast by RMB39mn. Its adjusted net profit (excluding share-based payments) remained flat YoY at RMB266mn in 2H24.
　　Both revenue growth and margins to improve in FY25E. We expect Tuhu’s revenue growth to accelerate to 12% YoY in FY25E from 8.5% YoY in FY24, as the YoY decline in single-store revenue contribution could slow down amid the recovery in consumer confidence in China. We project Tuhu’s store number to rise by more than 900 YoY to about 7,800 in FY25E following the net addition of 965 stores YoY in FY24, as franchisees’ willingness to open new stores has been increasing since 4Q24, according to management. We expect overall gross margin to rise 0.8ppts YoY to 26.1% in FY25E, driven by lower procurement costs amid greater economies of scale and higher sales portions from the high-margin exclusive and private-label products. The company has tried to improve customer experience and operational efficiency with AI technology. Therefore, although the advertising and promotion-related expenses may remain at a high level of about RMB160,000 per store in FY25E in a bid to grab market share, the total operating expense ratio (as % of revenue) may fall 0.7ppts YoY to 22.9% in FY25E, based on our estimates.
　　Earnings forecasts and valuation. We raise our FY25E net profit by 10% to RMB703mn. The adjusted net profit could rise 32% YoY to RMB826mn this year on our estimates. We maintain BUY rating and lift target price from HK$20.00 to HK$21.50, still based on 20x adjusted FY25E P/E. Key risks include slower network expansion, lower revenue and/or margins than we expect, as well as a sector de-rating.