2023H1 Company Income/Adjusted Net Profit +3.0%/+17.0% YoY. H1 is affected by product restructuring. The company's sales volume has declined and revenue growth has been slow, but konjac products have recovered to double digit growth; due to price increases, raw material costs, and supply chain efficiency improvements, the company's profitability has increased year-on-year. We believe that the company H2 is expected to grow rapidly, mainly due to: 1) the end of the painful period of price increases and product restructuring; 2) the launch of new products; 3) intensive channel cultivation brought about by ancillary sales and sales aid, and the accelerated layout of mass snack channels.
Performance review: In 2023H1, the company's revenue increased by 3.0%, and net profit attributed/adjusted net profit increased by 271.4% /17.0%. At 2023H1, the company achieved sales revenue of 2.33 billion yuan, +3.0% year-on-year, net profit of 450 million yuan, +271.4% year-on-year, adjusted net profit of 500 million yuan, +17.0% year-on-year, and a year-on-year increase in profitability.
The painful period of restructuring H1 spicy strip products is nearing its end, and konjac sales are gradually recovering. 2023H1, flavored noodle products business revenue was 1.29 billion yuan, -3.9% year-on-year, of which the tonnage price was +26% and sales volume -24%. The slight decline in revenue for flavored noodle products in the first half of the year was mainly due to the fact that H2 began cutting products with prices of 0.5 yuan last year. The product structure adjustment is expected to be over; the vegetable products business revenue is 930 million yuan, sales volume is +14.1%, of which the decline in sales volume of konjac is +16%, sales volume is significantly narrowed; soybean products and other business revenue is 110 million yuan, +3.7% year on year, of which sales volume is +15% and sales volume is -10% .
Gross margin increased significantly year-on-year, increased investment in marketing and channel expenses boosted sales utilization, and adjusted net interest rate increased year-on-year. 2023H1's gross profit margin was 47.5%, +9.4 Pcts year on year, mainly benefited from 1) product restructuring brought about an increase in tonnage prices; 2) lower costs of raw materials such as fats, oils, packaging materials, etc., and improved supply chain efficiency. Among them, the gross profit margin for seasoned noodles/vegetable products/soy products and other businesses was 45.4%/51.7%/36.9%, respectively +10.5/+8.5/-3.5 pcts. The 2023H1 company management rate was 9.4%, year-on-year -0.3 Pcts; the sales rate was 15.8%, year-over-year +3.9 Pcts, mainly due to the company's increase in brand promotion and advertising expenses, while the increase in labor costs brought about by the increase in sales team; the financial rate -3.7%, year-on-year -2.7 Pcts, mainly due to increased interest income; finally, the company adjusted the net interest rate to 21.4% year-on-year, +2.6 Pcts.
Outlook H2: The price increase adjustment period has passed. Combined with the launch of new products and channel layout, the company is expected to return to good growth.
Looking ahead to H2: We are optimistic that the company's revenue side will accelerate month-on-month growth over H1. The main reason is that 1) it has entered H2, and that the year-on-year basis effects of price increases and product structure adjustments no longer exist; 2) the company promotes channel cultivation through ancillary sales and marketing, while also accelerating the channel layout of mass-selling snack stores; 3) the launch of new products of different specifications, flavors, and shapes. On the profit side, the price increase base effect H2 no longer exists. At the same time, prices on the raw material side have stabilized, and the intensity of sales expenses has stabilized. It is expected that the company's overall net interest rate will not fluctuate much year-on-year.
Risk factors: The company's new product performance fell short of expectations; the company's channel reform fell short of expectations; food safety issues; industry competition intensified; raw material costs rose sharply; the impact of the epidemic exceeded expectations; the company's production capacity construction progress fell short of expectations; the company's channel inventory risk.
Investment suggestions: Considering the slow growth of the company's revenue in the first half of the year, lower the company's EPS forecast for 2023/2024/25 to 0.41/0.47/0.53 yuan (the original forecast was 0.44/0.52/0.59 yuan). Referring to comparable company Qiaqia Foods/Yanjin Shop/Ganyuan Food's dynamic PE 19/30/25x (Wind unanimously anticipated), considering the company's leading position in spicy bars and a relatively stable performance growth trend, PE 20x for 2023 was given, corresponding to the target price of HK$9, maintaining the “buy” rating.