Event: The company released its three-quarter report for 2023. The first three quarters achieved operating income of 1.36 billion yuan, an increase of 104% over the previous year, and net profit of 82.52 million yuan, an increase of 4.6% over the previous year. Among them, 2023Q3 achieved operating income of 480 million yuan, an increase of 94.7% over the previous year, and net profit of 34.84 million yuan, an increase of 4% over the previous year.

Add probiotics and supply chain businesses to drive a significant increase in revenue. In the first three quarters, the lactic acid drink, probiotic food, and beverage supply chains achieved revenue of 5.1 billion yuan (-0.9%), 120 million yuan (+225%), and 650 million yuan respectively. 1) The revenue side of Weidynamics products is mainly recovery, products are upgraded with patented strains, and product packaging is refreshed accordingly. In addition, starting in March 2023, the company will increase the price of some flavor power products by 3%-6%, compounded by a drop in the price of raw materials for milk powder, and the profit elasticity of lactic acid bacteria drinks will be further demonstrated. 2) The probiotic business is integrated into Junyao Runying, and will drive Runying's growth in 2023-2025 with recovery - rapid growth - expansion as a development path. 3) Integrating the pan-edge supply chain can realize the “raw material-product-channel” integrated ecological chain model. By the end of 2023Q3, Panyuan Supply Chain had formed 14 business divisions and added 216 upstream suppliers to empower the company's sales.

Changes in business cause fluctuations in profit levels. 1. The overall gross profit margin for the first three quarters was 24.7%, down 8.6pp from the previous year.

2. In terms of expense ratio, the sales expense ratio was 10.7%, down 5.2pp year on year; management expense ratio was 6.5%, down 0.6pp year; R&D expense ratio was 1.2%, down 0.4pp year; and financial expense ratio was -0.4%, up 1pp year on year, mainly due to a decrease in interest income. 3. The overall net profit margin for the first three quarters was 6.5%, down 2.8pp from the previous year. In 2023, due to the merger of Junyao Runying and Panyuan Supply Chain business, the company's profitability changed greatly. The company's profitability will gradually increase as the price of Weidynamic products is launched and new probiotic products are launched.

Reorganize Runying Biotech to enhance probiotic business capabilities. In February 2023, the company completed the bankruptcy and restructuring of Runying Biotech. Junyao Runying has developed and produced more than 50 types of probiotic bacteria in China. It has a probiotic strain resource bank with more than 4,000 independent intellectual property rights. Its business scale and technical capabilities are leading in China. After the integration, the two sides can form collaboration in terms of strain reserves, production technology, and overseas markets, which will further enhance the competitiveness of Junyao Health in the probiotics business. Runying's revenue plans for 2023-2025 are 130 million yuan, 270 million yuan and 530 million yuan respectively, and net profit targets are 300 million yuan, 0.8 billion yuan and 180 million yuan respectively. Currently, Runying continues to produce at full capacity. After the new equipment is put into production in the second half of the year, production capacity will reach 4 times that of the original; orders from core customers have been placed in line with the release of production capacity, and high growth can be expected.

Profit forecasts and investment advice. The company's net profit for 2023-2025 is estimated to be 91.36 million yuan, 150 million yuan, and 230 million yuan respectively; EPS is 0.21 yuan, 0.34 yuan, and 0.54 yuan respectively; corresponding dynamic PE is 60 times, 38 times and 24 times, respectively. Considering that the profit after Junyao Health is integrated into Runying will increase dramatically and that the second growth curve of probiotics is clear, the company was given 46 times PE in 2024, corresponding to the target price of 15.64 yuan, covering the first time, and giving it a “buy” rating.

Risk warning. Risk of raw material price fluctuations; risk of production capacity release falling short of expectations; food safety risk.