Event: Tianrun Dairy announced its semi-annual report for 2023. 23H1, the company achieved operating income of 1,389 million yuan, +12.62% year-on-year; net profit of 126 million yuan, +16.55%; realized net profit of 1.17 yuan after deducting non-return net profit of 1.17 yuan, +21.05% year-on-year. Among them, 23Q2 achieved operating income of 758 million yuan, +9.77% year-on-year; net profit of 70.83 million yuan, -2.45% year-on-year; and realized net profit of 68.19 million yuan after deducting non-return net profit of 68.19 million yuan, +5.16% year-on-year.
Comment:
The recovery in dairy consumption was weak, and performance outside of the country fell short of expectations. The overall recovery of the dairy industry in Q2 was weak. Oversupply of domestic milk sources caused milk prices to drop 6.81% year on year in Q2 and 4.26% month on month. In this context, the company's revenue side performed steadily, achieving revenue of 758 million yuan in 23Q2, +9.77% over the same period. By product, room temperature dairy products/low temperature dairy products/animal husbandry products achieved revenue of 427 million yuan/315 million yuan/12.44 million yuan respectively, +18.54%/+4.96%/-53.25% over the same period last year. Furthermore, judging from the reporting side, the Xinnong Dairy Industry, which was newly consolidated in June, achieved revenue of 32.46 million yuan. Looking at the subregion, Q2 companies achieved revenue of 395 million yuan/361 million yuan, compared to +5.86%/+14.03% year-on-year. Performance outside of the country was affected by the overall situation in the industry and fell short of expectations.
Operating profit increased year-on-year, and disposal of cattle disrupted the growth rate of net profit returned to the mother. On the cost side, the company achieved a gross profit margin of 20.97% in 23Q2, +2.11pct over the previous year. We speculate that this is mainly due to the dividends brought about by the current low milk prices and structural improvements brought about by brick products. On the cost side, the company's performance was good. The 23Q2 sales expense rate, management cost rate, R&D expense rate, and financial expense ratio were 5.18%, 3.05%, 0.83%, and 0.34%, respectively. +0.13 pct, +0.41 pct, +0.61 pct, +0.53pct, and +0.53pct, respectively, bringing the operating profit margin to 12.31%, +0.36 pct, and Q2 operating profit +13.06%. The year-on-year decline in net profit due to non-operating income and expenditure was affected by non-operating income and expenditure. Q2 non-operating expenses reached 12.93 million yuan, mainly due to loss of cattle disposed of by the company's subsidiaries.
In the first half of the year, management was proactive, and there were many highlights. 23H1, the company actively seeks change. Looking at the merger and acquisition side, the company successfully acquired 100% of the shares in Xinnong Dairy. As a full-industry chain company, Xinnong Dairy is expected to complement Tianrun in terms of milk sources, adult milk powder, etc., and strengthen the company's market influence in China and Zhejiang. In terms of upstream farming, the company invests in the premium herding industry, lays out forage cultivation business, makes up for shortcomings in forage supply, and ensures scientific feeding of cows. On the product side, the company launched as many as 16 new products in the first half of the year. In terms of product promotion, the company focuses on promoting sea buckthorn milk beer and Tianrun organic pure milk, which has a high market exposure. On the market side, the company further segmented the market, promoting Fujian as a key market, and Beijing-Tianjin-Hebei cultivating the market.
Profit forecasting and investment ratings: The margin of safety is here, and we are waiting for revenue growth to pick up. The company's recent retracement in stock prices has brought its price-earnings ratio valuation back to the bottom of the historical range. Despite the current weak consumption environment in the dairy market, a market size of about 600 billion yuan is still promising for Tianrun, which has revenue of 2.4 billion yuan in 2022. On the other hand, the improvement in the company's new product development capabilities and market development capabilities in recent years is obvious to all, and it is expected that with continuous expansion of production capacity and categories, it will achieve outstanding performance independent of the industry. Based on the company's current performance and the situation with Xinnong, we expect the company's EPS in 2023-2025 to be 0.75/0.88/1.01 yuan, corresponding to 18X/15X/13X PE in 2023-2025, respectively, and maintain the company's “buy” rating.
Risk factors: food safety issues, increased competition in the industry, production expansion fell short of expectations