Incident: The company released its report for the first quarter of 2023.
2023Q1, operating income of 427 million yuan/ +0.27%, net profit of 14 million yuan/ -29.27%, net profit of returned mother of 123 million yuan/ -31.05%, basic earnings per share of 0.15 yuan/ -46.43%.
Comment:
Overall, the company's revenue for the full year of last year was 1,887 million yuan/ +1.75%, maintaining the overall growth trend. However, due to the blockage of shipping in the first half of the year, major overseas customers stepped up their inventory, which led to massive inventory removal in the fourth quarter. The company's revenue side was under pressure, from -27.48% to 377 million yuan compared to the previous year. However, inventory consumption was fast due to many overseas holidays in the second half of the year, and the Q1 pressure achieved by +0.72% year-on-year. The overall trend is improving. It is expected that the Q2 growth rate will increase, and by this year's H2, basic inventory pressure will drop from overseas inventory. After elimination, Revenue is expected to resume growth of nearly 20% throughout the year.
From a business perspective, 1) Pet use: According to the previous year's report, in the pet business, which accounts for about 70% of the company's total revenue, gross margin increased slightly by 0.91 pct to 21.68% from last year, and the overall profit level was relatively stable. Among them, according to gross margin level, pet toys were 23.53% /+1.02pct, cat crawler 22.60% /+1.37pct, pet mat 22.39% /+0.77pct. The company owns tens of thousands of SKUs, and placed more autonomy up and down to supervisors in SKU sales and profit management Manager, flexibly balance sales volume and profit space. With the penetration of local professional pet breeding, while category sales are expected to increase, scale effects will also be evident.
2) Pet food: Gross margin increased sharply by 7.47pct to 54.01% last year. First, due to the exit of the intermediary Taiwan Tianjun in the past, the agent profit sharing process was reduced. Second, it stemmed from favorable exchange rates. Looking at this year, with the outbreak of domestic pet racing, the pet business is expected to grow rapidly and the share of business revenue further increased, but exchange earnings declined or slightly depressed sector profits. Looking ahead to 2023, the company will continue to focus on dog kennel and cat stand categories to create super products. By promoting sales coordination between pet food and pet use, building a supply chain for all categories, empowering many offline “little B” customers, improving and optimizing the company's own sales network, deepening terminal cooperation and enhancing brand influence.
On the cost side, the sales/management/R&D/finance rate was -0.19/-0.22/+0.43/+0.43/+0.18pct to 6.73%/3.49%/1.39%/1.31%. On the one hand, the company increased investment in R&D, and the R&D rate continued to increase on the same period. On the other hand, exchange earnings decreased compared to last year, reducing the offset of financial expenses, which led to an increase in financial rates. On the operating side, net cash flow from operating activities was -375 million yuan, changing from positive to negative, mainly due to the sharp increase in pet food purchases paid in Q1 this year compared to the same period last year. Inventory at the end of 23Q1 was 688 million yuan, a sharp increase of 81.57%. Pet food is an imported product. There are certain shipping and customs clearance links. The procurement cycle is usually 3-4 months, and domestic pet food business volume has increased, leading to an increase in inventory; leasing debt is +45.35% compared to the same period last year, mainly due to the US OSI subsidiary increasing the company's overseas warehouses.
Investment suggestions: As an integrated dealer of pet products, the company has accumulated a large amount of upstream production resources and downstream distribution cooperation channels over the years, covering tens of thousands of SKUs, and the advantage of scale is prominent. In recent years, it has also used cross-border e-commerce to represent high-end foreign pet brands “Desire” and “Acanna”, improving the efficiency of agency profits and forming a good mutual flow with the company's pet business.
The company's revenue for 2023-2025 is estimated to be 23/28/3.4 billion yuan respectively, net profit of 1.47/180/227 million yuan, corresponding to EPS (diluted) of 1.63/2.00/2.52 yuan. The current stock price corresponding to PE is 21/17/14 times, maintaining the “buy” rating.
Risk warning: industry competition has worsened; prices of upstream raw materials have risen more than expected; channel costs have increased; domestic specialized pet breeding has not penetrated at an ideal rate.