1H23 performance is basically in line with our expectations.

Reliable shares announced 1H23 results: income 563 million yuan, year-on-year-2.3%; return to the mother net profit of 21.89 million yuan, a substantial increase over 1H22, mainly due to the sharp rise in raw material prices in the same period last year, the profit base is small, the performance is basically in line with our expectations. On a quarterly basis, 1Q/2Q23 achieved revenue of 319 million yuan, compared with 4.2% of the same period last year, and net profit of 1110Universe 10.79 million yuan, which was + 466.9% year-on-year.

Trend of development

1. Income from adult incontinence products has maintained good growth, and the decline in raw material prices has contributed to the improvement of gross profit margin.

1H23 achieved revenue of 563 million yuan,-2.3% year-on-year; gross profit margin increased 5.3ppt to 17.5% year-on-year, mainly due to lower raw material costs and lower sea freight. In terms of business, ① adult incontinence products:

1H23 income 290 million yuan, year-on-year + 16.2%; gross profit margin year-on-year + 1.1ppt to 15.4%; ② baby care products: 1H23 income 208 million yuan, year-on-year-23.4%; gross margin year-on-year + 9.9ppt to 19.6%; ③ pet health products: 1H23 income 46 million yuan, year-on-year + 4.1%; gross profit margin + 15.7ppt to 14.7%.

2. The results of cost reduction and efficiency increase have been shown, boosting the net interest rate to rise compared with the same period last year. During the 1H23 period, the expense rate decreased from 1.2ppt to 10.8% compared with the same period last year, of which the sales expense rate was from-0.9ppt to 7.7%, mainly due to the adjustment of the company's personnel structure and the improvement of output efficiency; the financial expense rate was from + 0.2ppt to-3.5% compared with the same period last year, mainly due to the decline in interest income and exchange income; the R & D / management expense rate was 3.9% and 2.7% respectively, which was the same as that of-0.4ppt/. In addition, due to the temporary loss of long-term settlement and sale of foreign exchange, the company lost 2.15 million yuan in fair value of 1H23. Under the comprehensive influence, 1H23 achieved a net profit of 21.89 million yuan, and its net profit margin increased from + 3.8ppt to 3.9% compared with the same period last year, of which the net interest rate of 2Q23 was raised to 4.4%.

3. Pay attention to the progress of self-brand product upgrading and channel development of adult incontinence products. The company adheres to the "independent brand + ODM business" two-wheel drive development model, and shifts the focus of development to adult incontinence products, and gradually transforms and upgrades from manufacturing enterprises to brand enterprises. In terms of independent brands, the company has formed a rich brand echelon, covering the high, middle and low end market; while focusing on moderate and severe incontinence products, it has launched mild incontinence products specially designed for Asian women. and continue to increase the R & D and marketing of middle and high-end products. We are optimistic that the company, as a leading brand of adult incontinence products in China, is expected to lead the development of the industry.

Profit forecast and valuation

The current share price corresponds to the price-to-earnings ratio of 32 times earnings in 2023 and 2024, while maintaining the 2023x2024 earnings forecast. To maintain the industry rating, taking into account the good growth of the company's own brand of adult incontinence products, we raised the target price by 19% to 14.8 yuan, corresponding to the price-to-earnings ratio of 39xb to 2023x2024, which has 22% upside compared to the current stock price.

Risk

Raw material price fluctuation risk; industry competition aggravates the risk; policy promotion is not as expected.