23H1 revenue was in line with expectations, while profit fell short of expectations. At 2023H1, the company achieved revenue of 9.74 billion yuan, +0.6% year-on-year. Although last year was a low base, the company continued to remove inventory this year, and revenue was basically the same; net profit for the return was 1.7 billion yuan, or -24.8% year-on-year. Excluding the impact of increasing impairment of biological assets in the pristine animal husbandry industry, net profit from endogenous homelands is still declining in double digits.
Mainly due to intense market competition, costs are still high.
The market share is stable, showing resilience, and is actively seeking product switching. 2023H1 ultra-high-end products/high-end products/general products were 597/2.6/330 million yuan respectively, about +6%/-13%/-21%, respectively, from the previous year, accounting for 61%/27%/3% of total revenue, respectively. The industry is still in the middle of a double-digit decline this year, but Feihe has shown the strength of its high-end strategy. Ultra-high-end products are still growing, mainly benefiting from the volume of products such as Zhuo Rui, to make up for the decline in classic Star Flying Sails. The offline/online market shares in June 2023 were 23.1%/13.1%, respectively, +0.0%/-0.4% from the January 2023 level. In the process of switching between the old and new national standards in the industry this year, there was frequent competition at low prices, yet Feihe's market share remained relatively stable, demonstrating the resilience of industry leaders.
The gross margin is still declining, and the cost ratio is still high. The gross margine/sales expenses/management expenses ratios for 2023H1 were 65.3%/35.5%/7.8%, respectively, compared to 2.3/+3.1/+1.0 pct. The gross sales gap is clearly under pressure, mainly because demand is still low, supply contraction is weaker than expected, the level of intense market competition has exceeded expectations, and major manufacturers in the industry have experienced unstable prices and many promotions. The gross margin of Yili 23H1 milk powder also dropped by 2.73 pct.
The reform of the digital ecosystem continues to advance, and prices and inventory are strictly controlled. Feihe carried out comprehensive channel reforms and promoted the construction of digital ecological stores. Transactions and settlement of offline mother and child stores are transferred online. Manufacturers receive payments at a unified retail price and then distribute profits between channels and terminals to enhance manufacturers' control over price lists, put an end to terminal random pricing and price comparison; and promote the development of new dealers and stores through first-time enrollment and lifelong binding. In the 23H1 digital ecosystem reform process, digital store shipments were controlled by about 2.5 billion dollars, leading to a decrease in revenue, while channel expenses were more rigid. 23H2's impact will weaken. Currently, the digital ecosystem has reached 40,000 terminals, achieving monthly sales of 400 million yuan.
The dividend rate has exceeded expectations, and the dividend ratio will continue to increase. 23H1 announced a mid-term dividend of 1.12 billion yuan, with a dividend rate of 66%. The payout ratio of the company's 21H1/21H2/22H1/22H2/23H1 was about 59%/40%/39%/53%/66%, respectively, and continued to increase. In the future, the company promises to continue to gradually increase the dividend ratio, with repurchases coming in second place.
Investment advice and profit forecasting. Based on the level of competition exceeding expectations, we reduced our profit forecast. We expect the company's revenue for 2023-2025 to be 212.7/227.4/24.55 billion yuan (previous value was 244.3/270.7/300.8 yuan), year-on-year, -0.2%/+6.9%/+8.0%; net return profit was 42.5/53.7/5.93 billion yuan (previous value was 61.3/77.2/8.65 billion yuan), -13.9%/+26.4%/+10.3%. EPS is expected to be 0.47/0.59/0.65 yuan in 2023-2025, respectively (previous value was 0.68/0.85/0.95 yuan). We gave the company 10xPE for 24 years (previous value 10xPE for 23 years), with a target price of HK$6.4 (1 HKD = 0.93 CNY, previous target price of HK$7.7), maintaining the “superior to market” rating.
Risk warning: The new population continues to be sluggish, competition is fierce, and new product promotion falls short of expectations.