We expect an adjusted profit caliber of about 1 billion yuan (+9.6% YoY) in 2023. We expect 2H23 Weilong's revenue +7.8% YoY, adjusted net profit +3.3% YoY, full year 2023 revenue of 4.88 billion yuan (+5.4% YoY), adjusted net profit of about 1 billion yuan (+9.6% YoY), and net profit to mother of about 918 million yuan, which is basically in line with market expectations.
Key points of interest
We expect 2H23 revenue growth to accelerate, mainly benefiting from the new channel layout and the expansion of the new product matrix.
1) Channel aspect: According to the company's announcement, cooperation with snack mass sales channels began in 2Q23. We estimate that in 3Q23, Weilong's snack sales channel will account for about 10% of the offline channel scale, and it is expected to increase further in 4Q. We expect Weilong's current entry rate in the TOP20 snack mass sales system to reach 100%. 2) In terms of new products: According to the company's official account, since September 2023, the company has launched the three major single product series: Overbearing Panda, Little Witch, and Flickly Fire. 2H23 has achieved a lot of new results. Overbearing panda (spicy spicy strips): Positioned as authentic spicy strips. Currently, marketing and promotion results are good in the Sichuan and Chongqing regions, and offline sales are fast.
Little Witch (konjac vegetarian belly): Konjac belly shape. The product features large slices of refreshing, crispy texture, delicious and less burdensome. Currently, it is being piloted online and in some offline regions, and the company plans to gradually improve the flavor. Crispy Fire (Spicy Crisps): Weilong's new crunchy and spicy brand with unique product flavor and packaging.
We expect gross margin to remain high in 2023, and the 2H23 sales expense ratio will increase with the promotion of new products, etc. 1) Gross profit margin: We expect gross margin to remain high in 2023 (about 46.3%), which is related to the decline in prices of many cost materials in 2023 and price increases for some 2H22 products. 2) Sales expense ratio: We expect 2H23's new product promotion to accelerate and cost investment to increase. We expect 2H23's sales expense ratio to increase.
Revenue growth is expected to accelerate in 2024 as new products and new channels expand, and valuations are expected to be boosted.
In 2023, the company's organizational system was further improved, execution was improved, and the supply chain system was further optimized and efficient. The expansion of the 2H23 new product sub-brand matrix accelerated markedly, and the layout of emerging channels was significantly accelerated.
We expect revenue growth to accelerate in 2024, driven by new products and new channels.
Profit forecasting and valuation
Considering the increase in 2H23's new product promotion expenses and the relative pressure on traditional channels, we lowered 23/24 net profit of 15.8%/17.8% to about 92/1.06 billion yuan, introduced a new profit of 1,212 billion yuan in 2025, and adjusted profit of 2023-2025 without RSU expenses of about 10/11.24/1.55 billion yuan, respectively. The company traded 12.2/10.2/8.7 times the 23/24/25 P/E; considering the recent downturn in the market valuation center and profit forecast adjustments, the target price was lowered by about 30.5% to HK$7.3, corresponding to 17/14/12 times 23/24/25 P/E and nearly 38.8% upward space, maintaining the outperforming industry rating.
risks
New product growth falls short of expectations, demand from traditional channels continues to be under pressure, and food safety risks.