Events:

On October 24, 2023, Tianrun Dairy released its third quarterly report for 2023. In the first three quarters, the company achieved revenue of 2.083 billion yuan, + 12.5% year-on-year; net profit of 143 million yuan,-7.44%; and non-return net profit of 144 million yuan, + 3.92%. In the third quarter, the company achieved revenue of 694 million yuan, + 12.25% year-on-year; net profit of 17 million yuan,-63.71%; and non-return net profit of 27 million yuan, year-on-year-35.52%.

Main points of investment:

Under the high base, the growth rate of 2023Q3 income outside the border has slowed down compared with the same period last year. From a regional point of view, the company's revenue in Xinjiang in the third quarter was 363 million yuan, + 8.23% compared with the same period last year, and the revenue growth rate accelerated month-on-month. It is expected that the revenue in the third quarter fully includes Xinnong Dairy (only June in the second quarter). Revenue in the third quarter was 325 million yuan, + 15.42% compared with the same period last year, and the growth rate slowed down this year due to the high base of revenue outside Xinjiang in the same period last year. In terms of products, the company's revenue from room temperature products in the third quarter was 390 million yuan, + 20.65% compared with the same period last year; revenue from low-temperature products was 268 million yuan, + 3.9% from the same period last year, and the low-temperature performance was weak, mainly due to: 1) the low-temperature industry has recovered slowly since the beginning of this year; 2) we expect the company's main cryogenic product, Aiklin yoghurt, to decline slightly from the same period last year.

The increase in milk self-sufficiency rate in the third quarter led to a month-on-month decline in gross profit margin, and showed that new farmers led to an upward rate of expenses, and superimposed cattle losses increased a drag on profits. The company's third-quarter gross profit margin was 17.62%, year-on-year + 0.01pct, month-on-month-3.35pct, mainly due to the significant increase in milk self-sufficiency rate and the reduction of dividends brought by the downward cost of purchased raw milk after the acquisition of new farmers. In the third quarter, the company's sales, management, R & D, and financial expense rates were 5.68%, 3.62%, 0.78%, 1.07%, respectively, compared with the same period last year-0.38pct/+0.41pct/+0.44pct/+1.07pct. The increase in financial expenses was mainly due to more debts such as stock loans and leasing liabilities for the development of new farmers. The company's non-operating expenses in the third quarter increased by 22 million yuan to 27.02 million yuan compared with the same period last year, mainly due to the loss caused by the disposal of cattle by the company's subsidiaries, and the company's profit performance in the third quarter was weak due to multiple reasons.

Profit forecast and investment rating: due to the current weak milk prices, the company expects new farmers to cause a certain drag on profits in the short term. In the long run, new farmers can complement the company in terms of both sales area and product structure. We believe that the advantages of acquiring new farmers outweigh the disadvantages. The company has a stable position in Xinjiang, and there has been a good differentiation in milk sources, products and channels in the process of market development outside Xinjiang. After this round of market reform, the development foundation is more solid, the current base is still small, and there is a lot of room for long-term development in the future. Due to the continuous drag of Xinnong, we downgrade the company's profit forecast. It is estimated that the company's EPS in 2023-2025 is 0.56 / 0.74 shock 0.95 yuan, corresponding to PE is 21-16-13 times, in view of the company's long-term core competitiveness remains unchanged, we maintain the "buy" rating.

Risk tips: 1) new product promotion is not as expected; 2) competition in foreign markets is intensified; 3) production capacity construction is not as expected; 4) raw material prices are higher than expected; 5) food safety issues.