Net profit for 2023 was slightly higher than our expectations

The company announced its 2023 results: In 2023, it achieved revenue of 21.45 billion yuan, +2.3% year on year, net profit to mother of 830 million yuan, +26.2% year on year; corresponding 2H23 revenue of 8.99 billion yuan, -0.9% year on year; net profit to mother was 230 million yuan, up 30% year on year. Revenue was slightly lower than our expectations, mainly due to distributors' prudent preparation due to relatively weak demand; net profit was slightly better than our expectations, mainly due to increased government subsidies.

Development trends

Weak demand dragged down 2H23 sales performance, and juice sales were relatively steady. 2H23's revenue was -0.9% year-on-year, and the growth rate was under pressure mainly due to the relatively weak performance of carbonated beverages and the prudent preparation of 2H dealers; in a year-round perspective, the company's sales volume was +0.5% year over year, and ASP was +1.8% year over year, and volume and price growth was steady. By category, 1) Soft drinks: 2H23 revenue was -2.5% to 6.67 billion yuan, year-on-year revenue was +0.6%, the main reason for the slowdown in growth was that carbonated beverages previously benefited from a relatively high household consumption base; 2) Juice: 2H23 revenue was +8.1% year-on-year, with steady growth, mainly due to the increase in the overall popularity of the juice category and the return of the juice source to the 450 ml classic bottle type; 3) Packaged water: 2H23 revenue was -20.5% year-on-year, mainly due to the company's increased sales price after leaving the factory There is some pressure. In 2023, the number of the company's service terminals further increased from about 2.6 million to about 2.9 million, demonstrating that the company continues to promote intensive channel cultivation. Furthermore, the company's new ready-to-drink coffee market share has reached 10%, and the performance is impressive.

Gross margins were under pressure in 2023, and sales rate improvements increased profitability. 2H23's gross margin was 0.4 ppt year on year. Looking at gross margin of -0.6 ppt year over the year, the main reason was the adjustment of accounting standards (deducting revenue from product discounts) and sugar costs were slightly pressured. The 2H23 sales rate was -0.4ppt year on year. Looking at the sales rate year-on-year, the sales rate was -0.9ppt year-on-year, driving the company's gross sales margin to expand by 0.3 ppt in '23 and driving an increase in core profit. Furthermore, benefiting from increased government subsidies and investment returns, the company's profit statement increased significantly.

Sales are expected to improve month-on-month in '24, and profitability is also expected to improve slightly. Our grassroots research shows that, benefiting from favorable travel and preparations for the Spring Festival, the company's sales performance improved from January to last year. We expect the company's new product launch pace in '24 or faster than '23. Considering new product contributions and channel expansion, we expect the company's sales to improve sequentially in '24. On the cost side, we expect raw material prices to be basically stable in 24. Considering product structure optimization, we expect the company's gross margin and net net interest rate to improve slightly year-on-year.

Profit forecasting and valuation

Considering the increase in government subsidies, the 24-year profit forecast was raised by 4.3% to $800 million; the company's current transaction was 8.4/7.6 times the 24/25 P/E; the target price of HK$3.8 was maintained, corresponding to 10.8/9.8 times the 24/25 P/E and 28.4% share price upward space, maintaining the outperforming industry rating.

risks

Raw material prices continue to be high, competition is intensifying, and demand is weak.