Time-honored Chinese brands have a reputation and have become the leading seasonal food brands. Wufangzhai was founded in 1921 and is an old Chinese rice dumpling enterprise. Focusing on the vision of “the leading Chinese festival food brand with glutinous rice food as the core”, the company actively expands diversified seasonal, baked, quick-frozen, marinated, and prepared dishes other than rice dumplings. According to the performance report, the company's revenue and net profit to mother in '23 were 2.64 billion yuan (yoy +7.0%) and 170 million yuan (yoy +23.1%), respectively.

Rice dumpling companies benefit from the low price of raw materials, and the baking industry is showing a healthy trend. 1) Rice dumplings: Top brands include Wufangzhai, Daoxiangcun, Zhenzhenlao, etc., and the leading position is stable. On the raw material side, the prices of pork, glutinous rice, and corrugated paper are relatively low, and the cost pressure on rice dumpling companies is expected to be low. 2) Mooncake: The mooncake industry is over 20 billion. Daoxiangcun, Huamei, and Wufangzhai have the highest share, with CR5 exceeding 60%. In 2023, mooncake consumption benefited from visiting family and friends offline and the revival of gift-giving scenarios, but it was also constrained by declining consumer spending power and increasingly fierce competition in the industry.

The basic plate of rice dumplings is growing steadily, and channel transformation is being actively promoted. In the first three quarters of '23, rice dumplings achieved revenue of 1.9 billion yuan (yoy +11%), with demand for high-end and low-end gift boxes improving. On the channel side, benefiting from the recovery in customer traffic in '23, chain store revenue increased 28% year-on-year in the first three quarters of '23. The company reorganized existing stores, reduced fixed costs and increased single-store profit under the “shrink, transfer, and close” strategy, and turned losses into profits in the chain store restaurant business. At the same time, the company has built a new model of light catering and heavy retail stores, and continues to refine direct management and franchise business models, which is expected to contribute to revenue growth. On the market side, the company continues to concentrate on the sinking markets of East China and Wuhan, using the provincial capital as an entry point to open up empty markets. Some cities such as Shijiazhuang performed well. Revenue from Northwest/Northeast China increased 15%/16% year-on-year in the first three quarters.

Build a diversified product matrix to create a new growth pole. In the first three quarters of '23, mooncakes achieved revenue of 160 million yuan (yoy -13%). Consumer demand fell short of expectations, and the mooncake business was temporarily under pressure. The company's mooncake channel has obvious advantages. On the one hand, it can rely on existing rice dumpling sales channels in advantageous regions. On the other hand, the company is actively piloting a general proxy system, which is expected to quickly promote the nationwide layout. Revenue from egg products and confectionery products increased from 241 million yuan in 19 to 267 million yuan in '22, accounting for about 10% of total revenue. Among them, frozen products such as rice balls and rice dumplings grew well, with sales at the level of 10 million. It is expected that the company will further invest resources to create large quick-frozen products. During the Spring Festival, the company mainly sells New Year's gift boxes. Dealers had plenty of preparation time before this year, and sales performance is expected to be better than the same period last year. Furthermore, the company actively creates a daily sales scenario with quick freezing and baking as the core, which is conducive to increasing off-season revenue and smoothing seasonal fluctuations.

We forecast the company's 2023-2025 earnings per share of 1.17, 1.49, and 1.73 yuan, respectively. Combined with comparable companies, we believe that the current reasonable valuation level of the company is 22 times the price-earnings ratio of 2024, and the corresponding target price is 32.78 yuan, giving it a purchase rating for the first time.

Risk warning: Consumer demand for rice dumplings during the Dragon Boat Festival is low, the growth rate of baking and quick freezing falls short of expectations, market expansion outside of East China falls short of expectations, and the risk of food safety incidents.