1HFY23 performance is in line with market expectations
The company announced 1HFY23 results: revenue of 11.3 billion yuan, +4.1% year-on-year, net profit of 1.73 billion yuan, +8.5% year-on-year; performance was in line with market expectations. No dividends were paid in the medium term, mainly due to high interest rates on US dollar loans and the company's consideration of overseas capital use arrangements. We expect the company to pay dividends at the end of the year or fiscal year.
Development trends
Revenue recovered moderately amid weak demand, and rice crackers and milk drinks performed better than snack foods. The revenue of 1HFY23 companies recovered moderately under weak demand. By category, the revenue of 1HFY23 rice crackers, milk drinks and snack food categories was +4.5%, +7.1%, and -1.5%, respectively; specifically: 1) Rice cricket products benefited from price increases and the expansion of overseas markets and emerging channels (overseas and emerging channels accounted for 20%, 10% respectively, a double digit increase), continuing a steady growth trend; 2) The dairy drink category achieved restorative growth under a low base, mainly due to catering channels, gift box scene restoration, and marketing activities, which accounted for about a share of revenue Half of canned milk increased year over year About 20%; 3) The growth in snack foods was under slight pressure, mainly because ice products declined by medium to high single digits from the previous year during the reporting period due to the pace of delivery, while candy also increased in single digits, which had an adverse effect on ice products.
Cost pressure has abated, and improvements in gross margin have been realized. The company's 1HFY23 gross profit margin was 45.2%, +2.4ppt over the previous year, mainly due to the weakening cost prices of palm oil, packaging materials, etc., and the gradual effects of the company's pre-pricing. By category, the gross margin of 1HFY23 rice fruit, milk drinks, and snack food categories increased by 6.6ppt, 2.0ppt, and 0.8ppt, respectively. The 1H operating expenses ratio was 26.2%, -0.3ppt over the same period, mainly benefiting from lower transportation rates and strict control of promotion costs. Overall, the 1HFY23 operating profit/net interest rate was +2.8/0.6ppt, respectively. The slightly weaker increase in net interest rate was mainly due to an increase in financial expenses.
Channel and product diversification strategies continue to advance, and profit margins may continue to recover in the context of slowing costs. The company continues to expand emerging channels and overseas markets. The emerging channel rice cake and snack food 1HFY23 achieved double-digit growth, and overseas markets also achieved high double-digit growth. Furthermore, thanks to the company's continuous efforts to promote new products, the share of new product revenue in the past five years has also reached double digits. We expect that diversification of channels and products will help the company achieve steady growth in the medium to long term. Looking ahead to 2HFY23, we expect that the cost reduction dividend may continue to be released, and that the cost of whole milk powder may drop in double digits year over year; in addition, after the company repays the US dollar loan, we also expect 2H's financial expenses to decrease year over year; overall, we expect the decline in costs and financial expenses to help the 2H profit margin continue to recover.
Profit forecasting and valuation
The company traded 13/12 times the P/E in 23/24. Considering weak demand, the profit forecast for the 23/2024 fiscal year was lowered by 3.1%/3.3% to $37.44/4.093 billion; the target price was lowered by 6.5% to HK$5.8 billion, corresponding to 17/15 times the 2023/2024 P/E and 24% share price upward space. Maintain an outperforming industry rating.
risks
Demand is weak; raw material prices are rising; and the contribution of new products and channels falls short of expectations.