The company's Q4 performance is likely to reverse, and the cash flow of operating activities continues to expand. According to the company's previous performance forecast for 2021, the company is expected to achieve a net profit of 6000-90 million yuan in 2021, deducting non-net profit of 6000-9 million yuan, turning losses into profits over the same period last year. In 2021, Q1-3 recorded a net profit of 38.75 million yuan, deducting non-net profit of-7.97 million yuan. From the perspective of disassembly, the company's Q4 return net profit is expected to be 2125-51.25 million yuan, deducting non-net profit is expected to be 1397-16.97 million yuan, a year-on-year turnround to profit, and set the tone for the annual performance reversal. On the other hand, relative to the company's net profit, the cash flow of its operating activities has already reversed in advance. Since Q3 in 2019, the cash flow of the company's operating activities has continued to improve, and Q3 has reached 92 million yuan in 2021, which is much higher than the net profit of the same period.

The founder returned to boost morale, reduce costs and increase efficiency and pay close attention to management. Founder Xie Hong resigned from the company in 2011 for personal reasons and returned to the post of general manager in January 2021. Xie Hong's return, on the one hand, has brought an effective boost to the company's bumpy and frustrated morale, and internal employees and dealers are full of confidence; on the other hand, it has also brought practical measures for the company's reform. In terms of strategy, the company has established a new mother-to-child retail business model with user data as the core, product-based and digitally driven. In terms of products, infant powder business, the company adopts multi-category strategy, focusing on cost-effective products, the main single Aijia price belt around 370 yuan / kg; at the same time, the company around the mother and child ecosystem, provide infant and child supplementary food, children's snacks, nutrition and special medicine food and other products. In terms of operation, the company promotes cost reduction and efficiency improvement in multiple dimensions. On the production side, the company actively discusses and cooperates with various parties to promote OBM, ODM and OEM projects and make full use of surplus capacity. On the channel side, the company actively promotes the cooperation between direct supply system and platform, reduces the dealer level and thickens the company and terminal profits. At the end of the organizational framework, the company streamlines the middle and background, promotes the sales end, and encourages all staff marketing. The company's research shows that the gross profit margin and net profit margin of the company's comparable business have improved since the return of the founder.

The prospect of the industry is good, and this year, we will pay close attention to the stock and increment. In recent years, the number of newborns in China has been declining continuously. After the outbreak, some couples' plans to prepare for pregnancy were postponed, and the rate of decline further intensified after October 2020. With the decline of the virulence of the virus and the gradual control of the epidemic, the number of newborns is expected to return to around 12 million in 2020. On the other hand, the rising per capita consumption of milk powder in all stages, especially the per capita consumption of milk powder in the third stage, will boost the overall scale of the infant powder blending market. In terms of the competition pattern, affected by the disorderly price of goods, the price of some competitors has been volatile recently, while the company adheres to cost-effective products and streamlined channel model, always stably controls the price, protects the interests of the channel, and the market share is expected to benefit from the price war. On the other hand, the company's long-term accumulated R & D system and excellent product quality will also make its own products break out under the rising tide of domestic milk powder and the re-registration of the new GB.

In 2022, the company will start from three major aspects to promote stock and incremental business. First of all, the company will continue to strengthen the basic plate of milk powder in traditional channels and increase the sales of original categories (such as the Aijia series). Secondly, the company will vigorously promote the sales of the new product Ke Ruixin in the direct supply channel and Jingai's sales in the online channel. Ke Ruixin, as the company's innovative work to solve the difficult problem of baby digestion and absorption, integrates probiotics, probiotics, OPO and hydrolyzed protein into one, dedicated to offline channels, with a very high performance-to-price ratio (retail price is about 300yuan). Jing'ai was out of stock in the first half of last year, and sales are expected to rise this year when the goods are full. Finally, the company actively uses the spare capacity to negotiate OBM, ODM and OEM projects with major customers to boost revenue and profits.

The company is expected to regain its strength. The company was previously caught in adjustment, mainly due to the long-term absence of the founder, resulting in a lack of internal management, reflecting problems at the channel end. After the return of the founder, learn from the previous lessons, the product side focuses on product quality and performance-to-price ratio; the channel side shortens the channel chain to strengthen channel control through digital intelligence; and the production side actively makes use of surplus capacity to cooperate. From the industry point of view, the number of newborns is affected by the epidemic in the short term, but is expected to recover in the medium term; high-end milk powder competition is fierce and some competitors' prices are chaotic; domestic milk powder is on the rise and the new GB secondary registration will further clear small manufacturers. Combined with the above factors, we believe that the company is expected to reverse from the trough and return to the forefront of the industry.

Profit forecast and company rating: the downward space is limited and the upward space is predictable. In 2022, the company will strengthen the basic market in the traditional channel, push Ke Ruixin in the direct supply channel, replenish Jing'ai in the online channel, and harvest orders in the major customer channel, with a clear reversal trend and greater profit flexibility. We estimate that the EPS for 2021-2023 will be 0.07, 0.15, 0.23 yuan, with a growth rate of 125%, 105%, 49%.

At present, the company's stock price and PB are at the bottom of the historical range, and the downward space is limited. We maintain the target share price of 7.9 yuan and maintain the "buy" rating.

Risk factors: food safety problems, intensified competition in the industry.