1H23 performance is in line with our previous expectations
The company announced 1H23 results: revenue of 9.735 billion yuan, +0.6% year on year; net profit of 1,696 billion yuan, year-on-year ratio of -24.8%; net profit excluding the impact of raw ecology +2%, net profit excluding the fair value adjustment impact of raw biological assets was about 1.9 billion yuan, -17% year-on-year, and an endogenous net interest rate of about 20%, in line with our expectations. The mid-term payout rate rose to 66%, better than market expectations.
Development trends
1H23's revenue performance is superior to the industry, and the “Three Excellent” high-end matrix was established to help future growth. According to Nielsen data, the sales volume of the infant formula industry in the first half of the year was -14%. The company promoted market share of +1.4ppt through high-end product growth and a digital ecosystem model. The offline market share reached 23.1%. The performance was superior to the industry, mainly driven by the good performance of ultra-high-end products. 1H23's ultra-high-end product revenue was +6%, and 1Q's lactoferrin product, Zhuo Rui and Zhuo Yao formed a “three excellent” ultra-high-end matrix. Zhuo Rui's 2Q sales volume was 217%, accounting for 17% of revenue. We expect “Sanzhuo” products to contribute at least 6 billion yuan in sales throughout the year, and are expected to continue to contribute to the company's main growth engine in the future.
The digital ecosystem model promotes long-term healthy development, and focuses on the subsequent progress of the digital ecosystem model.
Since May of this year, the company has promoted the digital ecosystem model, disrupting the previous link from goods to dealers to terminal stores to consumers, opening up the Xing Ma Preferred, Dealer, and Store Ecosystems. Stores only display empty cans. Products are sold directly at a unified retail price through the Xingma Preferred System, and distributed uniformly to dealers and terminal stores after receiving payment. The company unifies marketing activities such as prices and promotions. The terminal can achieve zero inventory, and the product to the consumer can be controlled within 3 months of the production date. As of August, the company had 40,000 digital ecosystem stores, with sales volume of about 300 million yuan in August. We expect monthly sales to exceed 400 million yuan and 500 million yuan in September and 4Q. We believe that the digital ecosystem model can more directly monitor order conditions, unify prices and promotions, avoid vicious terminal price competition, and guarantee dealer profits. At the same time, digital ecosystem dealers and stores enjoy exclusive digital ecosystem products such as 900g Starfly, Zhuorui Miracle Can, and Zhuo Wu Wonderful Can. As the digital ecosystem progresses, we expect the company to gain further market share. 1H23 has cleared the digital ecosystem StarFlying Sailing's inventory of more than 2.5 billion yuan. Currently, the overall Starflying Sailing inventory is only 0.7x the health level.
2H23's revenue and profit margin performance are expected to gradually improve. 1H23's sales expense ratio has increased due to the increase in digital platform construction costs, etc. As the digital ecosystem begins to bear fruit, we expect the cost rate to gradually decline in the second half of the year. We recommend paying attention to the gradual improvement in the company's revenue and profit margin in the second half of the year. We believe that the construction of the digital ecosystem platform and ultra-high-end products are expected to drive continuous improvement in the company's revenue.
Profit forecasting and valuation
The company is currently trading 9.0/7.7 times the 2023/24 price-earnings ratio. Considering the pressure on the milk powder industry, we lowered our 2023/24 profit forecast by 18.1%/13.3% to $43.35/4.882 billion yuan; we lowered our target price by 20% to HK$6, corresponding to 11.2/9.6 times the price-earnings ratio for 2023/24 and 24.7% upward space.
Maintain outperforming industry ratings.
risks
Demand is weak; competition is intensifying; digital expansion falls short of expectations.