The first batch of room temperature lactic acid bacteria, started a business for the second time, and marched towards the first probiotics. The company entered the room-temperature lactic acid bacteria market in dairy drinks in 2011, and used this as its main business. It is one of the earliest domestic brands to produce and sell room-temperature lactic acid bacteria drinks. In 2020, the company was listed and traded on the main board of the Shanghai Stock Exchange and became “the first stock in the field of room temperature lactic acid bacteria drinks”. During the “14th Five-Year Plan” period, the company “started a business for the second time”, actively developed and cultivated new products, established a strategic direction for health products with functional probiotics as the core breakthrough, and moved towards the “first probiotic stock”. The average revenue of the company in 17-22 was 1.07 billion yuan, and net profit attributable to mother was 202 million yuan. The company's restructuring was completed in the first half of 2023. In the first three quarters of 2023, the company achieved revenue of 1,356 million yuan (YOY = 104.31%) and net profit to mother of 83 million yuan (YOY = 4.57%).

Room temperature lactic acid bacteria drinks continue to upgrade product/channel to drive growth. According to the company's prospectus, quoting Euromonitor data, China's lactic acid bacteria drinks maintained an average compound growth rate of 11.2% from 2015 to 2019, and the market size was about 36.48 billion yuan by 2019. The room-temperature lactic acid bacteria drink market in mainland China was only 7.72 billion yuan in 2015, reaching 14.88 billion yuan in 2019, with a compound growth rate of 17.8%. Also, according to the company's prospectus quoting Euromonitor international data, the company's market share in 2019 was about 15.1% of the sales of the room temperature lactic acid bacteria drink market in mainland China based on retail sales.

The company continues to expand and segment the main business of room temperature lactic acid bacteria, optimize and activate old products, and continuously iteratively upgrade. In 2022, the new product performed well in the post-meal lightweight market, becoming the second largest single product with sales of over 100 million after Weidongli 330. In the first half of 2023, the company adjusted the factory prices of some Weidong products, updated and upgraded the packaging of Weidong's patented strains, and added patented strains to strengthen the outstanding core interests of the products, differentiated divisions, and greater recognition. In terms of channels, the company's sales market is mainly concentrated in the Xiashen County market in second- and third-tier cities, and extends in both directions. By the end of 2022, the number of new channels such as CVS and vending machines in the company's cities had increased by 11,000, and the company continued to strengthen the balanced development of urban and rural markets.

Reorganize the profit and improve the healthy layout. According to the restructuring report, the market size of China's probiotic industry will exceed 100 billion yuan in 2023, and the market size is expected to reach about 150 billion yuan in 2025, with an average annual growth rate of more than 15%.

In the first half of 2023, the company further improved the layout of the health industry through the successful integration of Runying Biotech. Junyao Runying is the first domestic probiotic manufacturer. It is the “Huangpu Military Academy” for probiotics in China, and is in a leading position in the country in terms of business scale and technical capabilities. Junyao Runying has an annual production capacity of 300 tons of lyophilized lyophilized bacteria powder. It has a wide export range. It is one of the largest probiotic production bases in Asia, and its products are sold to more than 72 countries and regions. In addition, according to the company's restructuring report, Runying will aim to achieve the following performance targets in 2023-2025:23-25 revenue of 133/26/531 million yuan, and net profit of 0.30/0.76/ 180 million yuan. In the first half of 2023, Junyao Runying's capacity utilization rate was good. In May, the capacity interest rate exceeded 120%. With the execution of orders from the company's core customers in the second half of the year, the promotion of matching production expansion plans will be further accelerated.

Profit forecasts and investment recommendations.

The revenue of the lactic acid bacteria milk beverage business fell 13.65% in '22, and 23H1 increased 5.46% year on year. Referring to this, considering that the country's macro environment is expected to gradually improve in the future and the increase in consumer confidence, we have given this business a revenue forecast of 5.00%/5.00%/5.00% for 23-25 years.

The revenue of the probiotic series food business increased 43.27% in '22, and 23H1 increased 220.99% year-on-year. Referring to this, we gave this business a revenue forecast of 200.00%/100.00%/50.00% for 23-25 years.

The revenue of the probiotic series business increased by 41.59% in '22, and 23H1 fell 13.44% year on year. Referring to this, we gave this business a revenue forecast of 15.00%/12.50%/10.00% for 23-25.

In terms of the total portion of other businesses, revenue in '22 increased 146.82%, and 23H1 increased 152.51% year-on-year. Referring to this, we gave this business a revenue forecast of 150%/80%/40% per year for 23-25.

On the gross margin side, 23H1 gross margin is 24.88%. Referring to this, considering economies of scale, a gross margin forecast of 25.00%/25.50%/26.00% for 23-25 is given.

We expect the company's revenue in 2023-2025 to be 1,506/22.05 billion yuan, net profit to mother of 0.96/1.42/188 million yuan, and corresponding EPS of 0.22/0.33/0.44 yuan/share, respectively. Based on the valuation situation of comparable companies, and considering the company's performance growth rate, the company was given a PE (2024E) valuation range of 22-28 times, corresponding to a reasonable value range of 7.26-9.24 yuan/share. For the first time, we covered and gave a “superior to the market” rating.

Risk warning. (1) Food safety risks, (2) downstream demand falls short of expectations, (3) market competition intensifies, (4) new products, new channels, and new market expansion fall short of expectations, and (5) fluctuations in upstream raw material cost prices and cost investment.