Incidents:
Tianrun Dairy released its 2023 semi-annual report on August 24. 2023H1 achieved revenue of 1,389 million yuan, +12.62% year-on-year; net profit of 126 million yuan, +16.55% year-on-year; net profit of 117 million yuan after deducting non-attributable net profit of 117 million yuan, +21.05% year-on-year. 2023Q2 achieved revenue of 758 million yuan, +9.77% year on year; net profit of 71 million yuan, -2.45% year on year; net profit of 68 million yuan after deducting non-attributable net profit of 68 million yuan, +5.16% year on year.
Investment highlights:
Revenue growth in the second quarter slowed compared to the first quarter. Looking at the subregion, the company's internal and external revenue for the second quarter was 395 million yuan and 361 million yuan respectively, +5.86%/+14.03% year-on-year. Compared to the first quarter's growth rate, there was a month-on-month change of -2.2 pct/-16.18 pct. Among them, the growth rate outside of the country slowed significantly, dragging down overall revenue performance. We expect that it is mainly due to a weak recovery in overall macroeconomic demand in the second quarter. The dairy industry is facing the problem of oversupply of upstream raw milk in stages. In the context of declining milk prices, competitors tend to adopt low price promotion strategies, and industry competition intensifies. Combined with the company's high revenue base in the same period last year, the company's revenue growth rate in the second quarter was slightly under pressure.
The performance of room temperature products was steady, low temperature products recovered slowly, and the decline in income from animal husbandry products dragged down the company's revenue in the second quarter. By category, in the second quarter, the company achieved revenue of 427 million yuan, 315 million yuan, and 112 million yuan respectively, with year-on-year changes of +18.64%, +4.96%, and -53.25%. The obvious decline in revenue from animal husbandry products is expected to be mainly due to the decline in sales prices of the company's consumable biological assets such as bulls, young animals, and eliminated cows in the second quarter. If animal husbandry revenue is excluded, the company's total revenue for liquid milk (that is, room temperature milk and cold milk) in the second quarter was +12.42% year-on-year.
Downward costs, combined with product structure optimization, raised the company's gross profit margin, and reported that Xinnong put pressure on the company's profits in the second quarter. In the second quarter, the company achieved a gross profit margin of 20.97% year-on-year and +2.11pct/+0.92pct. The main reasons were: 1) the further decline in the purchase price of raw milk in the second quarter; 2) the company's product structure was optimized and upgraded, with tonnage prices +6.07% in the first half of the year; 3) a further increase in revenue share outside of China. Q2 The company's revenue share from outside of China accounted for 47.67%, year-on-year +1.75pct/+7.13pct. The overall product structure outside of Jiang was superior to that within. In the second quarter, the company achieved a net interest rate of 9.35%, year-on-year -1.17pct; achieved a sales, management, R&D, and financial expense ratio of 5.18%/3.05%/0.83%/0.34%, year-on-year, +0.13 pct/+0.41 pct/+0.61 pct/+0.53pct. The increase in R&D expenses was mainly due to the company's increased new product development, and the increase in financial expenses and liabilities was mainly due to Xinnong Development's own stock loans, leases, etc. According to the company's announcement, Xinnong Dairy was consolidated for one month in the first half of the year, with a total consolidated revenue of 32.456 million yuan and profit of 535,600 yuan. Xinnong's current profitability is significantly lower than that of the company headquarters, dragging down the company's profit-side performance.
Channel construction outside of the border and market structure adjustments go hand in hand, and the Shandong factory is expected to contribute revenue growth in the fourth quarter. In terms of channel construction, the number of dealers outside of the country increased by 119 to 490 in the first half of the year compared to the end of 2022. We expect to mainly merge into Xinnong Dairy distributors. Compared with the net opening of 95 to 859 specialty stores at the end of 2022, channel expansion is progressing steadily. In terms of market structure, the company further focused on key markets, listed Shandong, Guangdong, and Jiangsu as focus markets, upgraded Shanghai to nurture markets, and focused more on resource investment. At the same time, the company's Shandong Qiyuan plant will begin production and sales in the fourth quarter of this year. Currently, the sales team has been completed and is expected to contribute a certain amount to the company's overseas revenue.
Profit forecast and investment rating: The company's internal position is stable. In the process of market development outside of the country, it has formed a good differentiation in milk sources, products, and channels. After this round of market reform, the development foundation is more solid and solid. Currently, the base is still small, and there is a lot of room for long-term future development. We expect the company's EPS from 2023 to 2025 to be 0.76/0.92/1.09 yuan, and the corresponding PE is 17/14/12 times, maintaining the “buy” rating.
Risk warning: 1) New product promotion falls short of expectations; 2) competition in markets outside of China intensifies; 3) production capacity construction falls short of expectations; 4) raw material prices have risen beyond expectations; 5) food safety issues.