Incident: The company released its semi-annual report for 2023. 1H23 achieved operating income of 1,389 million yuan, +12.62%; net profit of 126 million yuan, +16.55%; net profit of 117 million yuan after deducting non-return net profit of 117 million yuan, +21.05% year-on-year. Among them, 2Q23 achieved operating income of 758 million yuan, +9.77% year-on-year; net profit of 71 million yuan, or -2.45% of the same period; net profit of 68 million yuan after deducting non-return net profit of 68 million yuan, +5.16% year-on-year.
Revenue growth has slowed in the off-season, and channel expansion is progressing in an orderly manner, laying the foundation for subsequent growth. 1) By product, 2Q23 achieved revenue of 427/315 million yuan for room temperature milk, respectively, +18.64%/+4.96% over the previous year. 1Q23 growth rates were 22.67%/4.95%, respectively. The growth rate of room temperature milk revenue slowed down or was affected by the summer heat. 2) Looking at the subregion, 2Q23 companies within and outside of China achieved revenue of 395/361 million yuan, respectively, +5.86%/+14.03% year on year, and 1Q23 growth rates were 8.06%/30.21%, respectively. 1H23's distributors in and outside of the country increased by 20/119 respectively, and the number reached 375/490 at the end of the reporting period. The number of dealers outside of the country has increased a lot. It is mainly speculated that the Shandong factory will soon be put into operation, and the company is preparing channels in advance. Furthermore, by the end of the reporting period, the number of the company's specialty stores had reached 859, an increase of 95 over the end of 2022, and the construction of exclusive channels continued to advance. 3) By channel, 2Q23's distribution/direct sales revenue was 674/83 million yuan, respectively, +9.85%/+7.69% over the previous year, and 1Q23's growth rate was 12.51%/43.59%, respectively.
The decline in the price of raw milk led to an increase in gross margin, and mergers and acquisitions led to a short-term increase in the cost ratio. 1H23 achieved a gross profit margin of 20.55%, +2.42 pct year on year. We speculate that it is mainly due to product structure optimization and raw milk cost reduction. Among them, 2Q23, the average price of fresh milk in major domestic production areas showed an accelerated downward trend. On 2023-6-28, the price was 3.79 yuan/kg, down 8% year on year. 1H23's sales/management/finance/R&D expense ratio was 5.36%/3.02%/0.47%/0.83%, respectively, and -0.20pct/+0.08pct/+0.63pct/+0.56pct, with a total increase of 1.07 pct for the four fees. Among them, the main reason for the increase in financial expenses was the increase in the company's loans due to the merger and acquisition of Xinnong Dairy Bank and the increase in letter of credit discounting; the increase in R&D expenses was mainly due to the increase in investment in new product development and animal husbandry technology. Achieved a net interest rate of 9.41%, +0.41 pct over the previous year.
The acquisition of Xinnong has further strengthened its dominant position within the country, and the commissioning of the Shandong plant will help develop the North China market.
In June 2023, the company began merging with Xinnong Dairy. On the one hand, this acquisition can increase the company's milk self-sufficiency rate, which is expected to increase from 65%-70% to 80%; on the other hand, Xinnong's sales area is concentrated in southern Xinjiang, Zhejiang, and online channels, complementing the company, which helps the company expand its market share outside of the country on the basis of consolidating its dominant position in the domestic industry. Furthermore, the Shandong factory will soon be put into operation, covering markets such as the Beijing-Tianjin-Hebei region with a surrounding radius of about 500 kilometers. The company is progressing sales preparations in an orderly manner, actively recruiting dealers, and connecting with channels such as the government, state-owned enterprises, and supermarkets. It is expected that a new breakthrough will be achieved in expansion outside of the country.
Profit forecast and investment rating: The company is expected to achieve net profit of 238/288/338 million yuan in 2023-25, +21%/+17%, respectively. The current stock price corresponds to PE of 18x/15x/13x for 2023-25, respectively. Considering the company's active investment in sales expenses and the layout of the Shandong factory, we believe that the company's market outside of the country is expected to continue to grow, and as production capacity is released outside of the country and the price of raw milk declines, the company's profitability is expected to increase and maintain the “recommended” rating.
Risk warning: Expansion outside the border falls short of expectations, Shandong factory commissioning progress falls short of expectations, increased industry competition, etc.