Projected 21.5% year-on-year increase in profit in '23
We expect Master Kong's revenue to be +2.9% YoY, net profit of 3.2 billion yuan, +21.5% YoY; corresponding to revenue of -1.1% YoY in the second half of '23, and net profit +13.1%, which is basically in line with market expectations and lower than the company's mid-year guidelines, mainly due to 3Q beverage sales falling short of expectations.
Key points of interest
2H23 sales performance declined, and sales in the beverage sector were ahead of schedule, and instant noodle sales were under slight pressure. We expect 2H23's beverage revenue to be +1.2%, an increase of about 5% throughout the year, which is lower than the company's previous expectations, mainly due to the forward pace of beverage sales throughout the year (1H23 beverage revenue +9.5%) compounded by lackluster 3Q demand and the impact of floods and rainy weather in the north (outdoor consumption scenario affected). By category, 2H23 juice revenue performance was better than packaged water and tea, while carbonic acid may have declined in the second half of the year due to overall market weakness. Our grassroots research shows a marked recovery in beverage sales in 4Q23. Currently, the company is actively preparing for the Spring Festival through gift boxes and other initiatives. We expect 2H23 instant noodle revenue to be -4.7%. Among them, ASP remains stable, and sales are under pressure, mainly due to a decline in the number and spending power of migrant workers entering the city, which is one of the instant noodle consumers, which affects instant noodle sales and the overall consumption environment is weak.
Overall, we expect 2H23's revenue to be -1.1%.
Benefiting from lower costs, 2H23's profit margin increased slightly. 2H23 In addition to the impact of higher sugar prices on the gross margin of beverages, the prices of other major raw materials are favorable, including palm oil, PET, etc. We expect the gross margin of 2H23 instant noodles to increase slightly, and the gross margin for beverages to remain basically the same. At the same time, considering that 2H23's sales are weaker than expected, and the cost ratio may rise slightly. Overall, 2H23's profit margin is expected to increase slightly. We expect 2H23 to make a profit of 1.56 billion yuan, +13.1% over the same period last year.
The 2024 outlook is steady, dividend rates are attractive for investment, and investment value is prominent. We expect the company to achieve medium to low single-digit revenue growth in 2024. Among them, the beverage industry is expected to return to steady growth at the annual level, benefiting from the unsweetened trend and the immediate demand for going out attributes, while instant noodles are expected to maintain steady growth at a lower base in 23 years. The company launched the jasmine green tea sugar-free version (3 yuan) and the pure extract zero sugar series (4 yuan) to lay out the sugar-free tea circuit. It is expected that further 5 yuan sugar-free products will be launched in the future. We judge that sugar-free products are expected to contribute additional increases in the future. Looking at the current time, the company's various costs are expected to remain basically stable in 24, and the upward pressure on comprehensive costs is limited. We expect profit margins to increase slightly. Overall, the company's fundamentals are stable, and downside risk stock prices are already basically reflected. Considering that the company is expected to maintain a 100% dividend rate, corresponding to a 24-year dividend rate of > 8%. The dividend ratio is highly attractive, and the investment value is evident.
Profit forecasting and valuation
The company traded 11.3/10.5 times the 2024/25 price-earnings ratio. Considering that demand fell short of expectations, the 2023/24 profit forecast was lowered by 10.5%/12.9% to $32/35 billion. At the same time, we introduced a 25-year profit forecast of 3.6 billion yuan; considering the declining market valuation, the target price was lowered by 30% to HK$10.5, corresponding to 14.9/13.8 times the 2024/25 price-earnings ratio and 31.6% upward space. Maintain an outperforming industry rating.
risks
Raw material prices continue to be high, competition is intensifying, and demand is weak.