Overseas inventory removal ended, operations gradually improved, demand increased quarterly, and the profit improvement logic was realized

The company's revenue and net profit to mother maintained relatively rapid growth in 2019-22, with CAGR reaching 13.8%/12.1% respectively. Affected by inventory removal from some overseas customers, the company's revenue has been under pressure since 23 years. The profit side was -19.5%/-9.0%/-12.6%, respectively. The profit side was affected by multiple adverse factors such as exchange, raw materials and factory depreciation, and profits gradually improved as raw material prices declined and customer orders resumed. Net profit due to Q2 and Q3 was 4721.9, 42.42 million yuan, respectively. The net profit margin for Q1/Q2/Q3 was -0.8%/13.7%/11.7%, respectively.

Industry perspective: The pet industry has been growing steadily through the cycle, and “its economy” can be expected in the future

According to Euromonitor data, the total CAGR of the global pet market reached 7.4% to US$184.66 billion in 2018-23. Overseas developed markets represented by the US showed characteristics such as resistance to cycles and strong demand. The growth rate of the pet industry far exceeded GDP growth under the pandemic. At the same time, according to Fact.MR data, thanks to the high replacement frequency and repurchase rate, it is estimated that the CAGR of disposable pet hygiene products will reach 8.7% in 2023-33, which is significantly higher than other categories in the same industry, and high-quality categories can enjoy industry dividends. The domestic market is in a high-quality stage of rapid growth. According to Euromonitor, the market size is expected to grow at a compound growth rate of 11.1% to 160.48 billion yuan in 2023-28, which is faster than the global growth rate; in 2022, China's pet products industry CR10 is only 11%, and the market is quite scattered. As a leading domestic exporter of similar products, Yiyi has a clear first-mover advantage. It is expected to fully enjoy the industry's growth dividends while actively grasping the huge growth in the domestic pet industry

Company perspective: Increased share of old customers & introduction of new products, new customers can be expected to continue to expand

As a leading domestic exporter of disposable pet care products, the company's products are exported to nearly 40 countries and regions. According to the company's annual report, in '22, the company's export value of disposable pet hygiene products, mainly pet pads and pet diapers, accounted for 38.1% of the export value of similar domestic customs products, which is a prominent advantage. The share of the company's major customers is relatively stable. The sales share of the top five customers has remained at around 50%. In recent years, the company actively seized more share of the original customers through continuous promotion and introduction of new categories, while vigorously expanding and exploring potential new customers to increase their cooperative stickiness. According to the company's customs investment activity record table, new customers in '23 contributed about 5% of revenue up to the first three quarters. We are optimistic about the new growth brought about by the continuous development of the company's customers, the increase in the share of new customers and category expansion.

Investment advice:

As a leading domestic health care product, the company is expected to fully benefit from pet economic dividends. With its comprehensive advantages in channels, customers, product research and development, large-scale production, etc., the company continues to expand new and old customers. The share of existing customers is increasing, and we are optimistic about its future growth. We adjusted our previous profit forecast. It is estimated that the company's revenue for 2023-25 will be adjusted from 1,417/17.01/2.042 billion yuan to 13.53/17.06/2.008 billion yuan, and EPS will be adjusted from 0.70/0.84/1.01 yuan to 0.59/0.90/1.07 yuan respectively, corresponding to the closing price of 12.64 yuan/share on January 31, 2024, PE will be 21/14/12 times, respectively, taking into account the rapid development of the company's pet products industry and itself as a leader It is expected to fully benefit and maintain a “buy” rating.

Risk warning

Risk of rising raw material costs, risk of exchange rate fluctuations, increased risk of industry competition, development of new customers falling short of expectations, overseas demand falling short of expectations, and fluctuating sea freight rates.