Incidents: In '22, revenue was 21,311 billion yuan, a year-on-year decrease of 6.43%; Guimu's net profit was 4.942 billion yuan, a year-on-year decrease of 28.07%. Among them, 22H2 achieved revenue of 11.638 billion yuan, an increase of 3.61% over the previous year; Guimu's net profit was 2,686 billion yuan, a decrease of 14.21% over the previous year.
Demand pressure+channel removal, revenue declined: the company's operating income fell 6.43% year-on-year in '22. By category, the revenue of infant formula products was 19.032 billion yuan, or -7.4% year on year. Other dairy products/nutritional supplements earned 1153/225 million yuan respectively, +16.4%/-16.6% year on year. The decline in revenue from infant formula products is mainly due to a decline in the birth rate. At the same time, the company implemented a fresh strategy in '22 to reduce channel inventories of products such as Xing Feifan. Furthermore, it is also related to increased competition in the industry.
In terms of channel construction, by the end of December '22, the company had more than 2,700 channel providers (more than 2,000 at the end of '21), covering about 94,000 retail terminals (110,000 at the end of '21). In the future, the company will focus on increasing the revenue of a single store to drive growth in overall performance.
The decline in gross margin drags down net profit margins: 1) The company's gross margin in '22 was 65.46%, a decrease of 4.82 pcts over the previous year, mainly due to rising raw material costs and an increase in the share of products with lower gross margins. 2) The company's sales expense ratio in '22 was 30.71%, an increase of 1.17 pcts over the previous year. However, sales expenses decreased by 2.7% year on year, mainly due to the company's reduction in promotional activities; 3) The management expense ratio in '22 was 7.2%, an increase of 1.9 pcts over the previous year, mainly due to the increase in employee costs and R&D costs. 4) Taken together, the net sales interest rate in '22 was 23.22%, a year-on-year decrease of 7.14 pcts.
Inventory levels have improved markedly, and industry pressure still exists: the pressure on the infant formula industry continues in 2022: the decline in the birth rate is the biggest obstacle to the industry. Furthermore, consumer spending power has been suppressed in the short term under the pandemic, and the problem of increased industry competition (price competition is prominent) is highlighted. Against the backdrop of significant pressure on the industry, the company insisted on channel inventory adjustments. Currently, the inventory is about 1.5 times the level, which is trending healthily. Judging from the segmented sales situation, the share of the 1/2 segment declined, the share of the 3rd segment increased. Children's fans were affected by worsening competition in the industry, and the growth rate slowed down. Product aspects:
The ultra-high-end + product [Zhuo Rui] is currently being cultivated as the second largest single product, and is expected to maintain a continuous high growth trend this year and next two years. Zhuo Rui's gross margin is about 10 pcts lower than the classic Star Feifan; adult fans are expected to achieve high double-digit growth in '23.
We believe that Feihe has come out of its early trough, but industry pressure cannot be ignored. We need to continue to observe changes in the pattern of the infant formula industry.
Profit forecasts, valuations and ratings: Considering the overall price decline in the milk powder industry and the decline in the birth rate, the overall pressure on the industry is strong. We lowered the company's 2023-24 net profit forecast to 5454/6.045 billion yuan (down 18.2%/19.6% respectively from the previous time), and introduced the 2025 net profit forecast to 6.610 billion yuan. Equivalent to 2023-25 EPS of 0.60/0.67/0.73 yuan, the current stock price corresponds to 2023-25 PE of 9x/8x/7x, maintaining the “increase in holdings” rating.
Risk warning: Economic growth is slowing and pressure is increasing, industry competition is intensifying, and food safety issues.