Event: Tianrun Dairy released its third quarterly report for 2023. 23Q1-3, the company achieved operating income of 2.083 billion yuan, + 12.50% year-on-year; net profit of 143 million yuan,-7.44%; and non-return net profit of 144 million yuan, + 3.92%. Among them, 23Q3 achieved operating income of 694 million yuan, + 12.25% year-on-year; net profit of 16.7 million yuan,-63.71%; and non-return net profit of 27.08 million yuan,-35.52%.

Comments:

Under the situation of weak recovery in consumption, the performance of corporate income is outstanding. Q3 dairy consumption recovery is still weak, milk prices continue to decline, year-on-year-9.1%, month-on-month-3.1%. Against this background, the company still recorded double-digit year-on-year revenue growth. In terms of products, the revenue of normal temperature dairy products / low temperature dairy products / animal husbandry products was 390 million yuan / 268 million yuan / 28.51 million yuan respectively, which was + 20.65% / 3.90% / 8.03% compared with the same period last year. From a sub-regional point of view, Q3 company achieved revenue of 363 million yuan / 325 million yuan in Xinjiang / outside Xinjiang, which was 15.41% compared with the same period last year.

The gross profit margin is robust compared with the same period last year, and the profit is affected by the new agricultural merger table and the price of eliminated cattle. On the cost side, the company's Q3 gross profit margin is 17.62%, year-on-year + 0.01pct, month-on-month-3.35pct. Milk prices have fallen this year compared with the same period last year, and there is room for gross profit margin to rise. We speculate that the month-on-month decline in Q3 gross profit margin is due to the decrease in the external production of fresh milk after the new farmers were merged. On the expense side, the 23Q3 sales expense rate, management expense rate, R & D expense rate and financial expense rate are 5.68%, 3.62%, 0.77% and 1.07%, respectively, compared with the same period last year-0.39pct, + 0.41pct, + 0.43pct, + 1.07pct. The overall expense rate remained stable, and only the financial expenses were slightly affected by the loans formed by the acquisition of new farmers. The decline in the company's return net profit is also affected by the increase in non-operating expenses and the change in income tax rate. From an operational point of view, profits are mainly affected by the decline in the price of eliminated cattle and the new agricultural merger table.

The management is positive and enterprising, and the progress is more flowering. In the third quarter of 2023, the company continues to advance a number of work. In terms of new agriculture and animal husbandry, the company actively promoted post-merger cooperation, the company leaders went to the new farmers for detailed research, and the new farmers also specially organized personnel to support production during the double-festival period to meet market demand. As for the Shandong factory, the project construction is in full swing, and the sales team has begun to promote and spread the market with beautiful brand products to lay a good market foundation for the factory to be put into production. With regard to the 200000 tons dairy processing project, on August 25, the liquid milk production workshop with an annual output of 200000 tons of dairy products in Tianrun Dairy completed the capping work, and the company expects the project as a whole to be completed and put into production by the end of October 2024.

Profit forecast and investment rating: sufficient margin of safety, pay attention to medium-and long-term value. The company's share price Q3 continues to retreat, the price-to-earnings ratio valuation is currently at the bottom of history, and the margin of safety is sufficient. Although short-term corporate profits have declined compared with the same period last year due to the decline in the prices of new agricultural mergers and eliminated cattle, on the one hand, these factors are not long-term, on the other hand, we should pay attention to the weak overall consumer demand at present. the company's revenue still maintains a good growth rate, indicating that the company has a clear advantage in the market competition. In the medium and long term, with the dissipation of the short-term impact formed by the new agricultural merger table, milk prices are expected to return to the right track in the future, superimposed by the continuous production of the company's new production capacity and the continuous promotion of market construction outside the border, and the company's profits are expected to return to the growth track. Based on the amalgamation of the company and Nannong, we estimate that the company's EPS for 2023-2025 will be 0.58 21X/18X/16X PE 0.67 max 0.79 yuan, corresponding to the 2023-2025 21X/18X/16X PE, respectively, and maintain the "buy" rating of the company.

Risk factors: food safety problems, increased competition in the industry, and production expansion falling short of expectations