Incident: The company recently released its three-quarter report for 2023. 2023Q1-Q3 revenue was 1,011 billion yuan, +3.58% year-on-year, net profit of 108 million yuan, +1.74% over the same period last year, and net profit of 90 million yuan was deducted from non-net profit. 23Q3 revenue was 344 million yuan, -5.79% year-on-year; net profit was 42 million yuan, -12.57% yoy, minus non-net profit of 0.3 billion yuan, +169.2% year-on-year.

Q3 Revenue was under pressure for a short time, and online performance was steady. 1) Offline: According to Nielsen data, the sales scale of the 2023H domestic offline toothpaste market was 11.18 billion yuan, -6.5% year-on-year. The toothpaste industry's offline consumer demand pressure had a certain impact on the company; 2) Online: According to Otteo Consulting, the toothpaste category increased 10.9% year-on-year from January to August 2023, with Douyin and Kuaishou becoming the fastest growing channels for the dental industry. The pressure on the company's short-term revenue will not affect the company's subsequent strength.

Brand upgrade & product optimization drive an increase in gross margin, and continue to increase marketing investment to help upgrade the brand. The company continues to promote product structure improvement and brand upgrading. 23Q1-Q3 gross profit margin was 44.19%, up 2.77pct year on year; 23Q3 gross profit margin was 46.88%, up 6.04/2.46pct year over year, respectively. In terms of expenses, the 23Q1-Q3 sales/management/R&D/finance expense ratio was 26.22%/4.36%/3.29%/-1.21%, respectively, with year-on-year changes of +2.38/0.36/+0.6/-0.38pct; 23Q3 sales/management/R&D/financial expenses were 26.31%/4.03%/3.89%/-1.15%, year-on-year changes of +4.03/+0.4/+1.46/-0.95pct, respectively. The increase in marketing investment, and the decline in the financial expense ratio is mainly due to an increase in time deposits and a simultaneous increase in interest income. In terms of profit, the net interest rate for 23Q1-Q3 was 10.65%, -0.19pct, and the 23Q3 net profit margin was 12.11%, -0.94pct.

Profit forecast and investment advice: The company has a strong leading position in the anti-sensitive toothpaste segment. In the future, the company is expected to adapt to the trend of localization and increase market share through iterative product upgrades, increased marketing investment to help upgrade brands, expand online and offline channels, and expand categories to lay out a large oral care ecosystem. We expect the net profit for 2023-25 to be 1.39/176/222 million yuan, respectively, and the PE corresponding to 2023-25 will be 36/29/23X, respectively, giving it a “buy” rating.

Risk warning: industry competition intensifies, channel expansion/new product promotion falls short of expectations, etc.