Demand is weak and competition is fierce in 2023. Performance is expected to be under pressure, and 2024 young people will enter the market. Channel research shows that in 2023, industry demand is under pressure and market competition is fierce. We expect goat milk powder to decline in high unit numbers in 2023 (23H1 down 13.3%, and the 23H2 decline is expected to narrow month-on-month), while milk powder will decline in low units throughout the year (23H1 will increase 2.4%). (The 23H2 month-on-month growth rate is expected to change from positive to negative). At the same time, we expect gross margin to be under pressure. On the one hand, there will be a decline in the number of medium to low units throughout the year. On the one hand, due to intense competition, the price market has declined; on the other hand, we have observed that there is also an excess supply of milk in the Netherlands, so it is not ruled out that Dabao Fen will have a negative impact on the company's gross margin. However, benefiting from better cost control, we expect sales expenses and management expense ratios to drop by the number of units. Overall, we expect a decline in the low to medium units of revenue and a double-digit decline in profit in 2023.

We expect both revenue and profit to recover in 2024. After two years of inventory removal from 2022 to 2023, the company continued to control the pace of shipment in order to control inventory and stabilize the price market. We believe that 2024 has reached the bottom of the stable period. It is expected that in 2024, goat milk powder will benefit from the launch of new domestic standard products (currently still mainly Yuebai), officially enter the US market in January, have a high recovery in units under a low base in 2023, and return overall to the level of the full year of 2022. Milk powder has been out of stock for two years, and high unit growth is also expected in 2024. At the same time, we expect gross margin to rise steadily, by a low number of units, mainly due to a reduction in the level of fierce competition. According to data from the National Bureau of Statistics, China's new population in 2023 was 9.02 million, exceeding market expectations. We believe that after the number of births bottomed out in the future, there is a marginal upward possibility that companies at the end of the industry will gradually withdraw. Overall, we expect the highest number of units of revenue to grow in 2024, and profit to return to around 300 million.

Expense control is good, and investment is carried out rationally. Expense control has always been implemented well. From the 2021-2022 period, it is close to the sales expense ratio level of 28%, and is expected to decline to around 26%. In a market environment with weak demand and fierce competition, the company rationally invests in sales expenses, and at the same time, the management fee rate is also declining. Various expense ratios have declined a lot, which can hedge against the negative impact of declining gross margin. In 2Q23, the company merged Hypnoke and Capability Multi-Brand Division to strengthen operating efficiency, effectively control expenses, and continuously improve the efficiency of cost use.

Profit forecast and investment advice: Based on the intensity of competition exceeding expectations, we reduced our profit forecast. We estimated that the company's revenue for 23-25 years was 75.0/81.0/8.59 billion yuan (previous value was 78.3/83.6/8.87 billion yuan); net profit to mother was 1.8/3.3/62 billion yuan (previous value was 4.4/59/ 750 million yuan); EPS was 0.10/0.18/0.34 yuan (previous value was 0.24/0.33/0.42 yuan), respectively. Referring to comparable company valuations and considering the possibility of a reversal of the company's future performance, we gave the company a target price of HK$3 (1HKD=0.91CNY, previous target price of HK$4.23) to maintain a “better than market” rating. Risk warning: The new population continues to be sluggish, the promotion of new products falls short of expectations, and competition in the industry is fierce.