Matters:

The company released its 2023 annual report, and achieved revenue of 6.759 billion yuan, +1.08% year on year; net profit to mother of 574 million yuan, -10.29% year over year; net profit after deducting non-return to mother of 552 million yuan, -12.31% year on year.

Looking at Q4 alone, the company achieved revenue of 1,692 billion yuan, +2.03% year over year; net profit to mother was 115 million yuan, -23.50% year over year; net profit without return to mother was 108 million yuan, -23.63% year over year. In addition, the company plans to distribute a cash dividend of 1.8 yuan (tax included) for every 10 shares to all shareholders.

Commentary:

Demand remained stable, and Q4 revenue was +2.03% YoY. By category, the company achieved annual revenue of 65.32/1.49/0.17 billion yuan, compared with +0.64%/+6.92%/+27.82%, respectively. Sales of bread, mooncake and rice dumplings were +0.69%/+13.19%/+36.48%, and the corresponding tonnage price was -0.05%/-5.54%/-6.34%, respectively. The staple food category of the main product bread performed better. Looking at the subregions, the Q4 revenue for Northeast China/North China/East China/Southwest/Northwest/Southwest/Southwest/South China/Central China was 6.44/3.61/5.15/2.03/1.14/0.33/0.44 billion, compared with -3.13%/-9.49%/-1.31%/+2.93%/+6.24%/-76.57%/-18.60%, respectively. North China, South China, and Central China's growth rate was heavily affected by changes in the company's Q4 division offsetting accounting caliber.

High return rates are compounded by depreciation effects, increasing profit pressure. The company's gross margin for 23 years was -1.2pcts to 22.79%, and the raw material/ manufacturing cost/ labor tonnage cost of the main product bread was +0.53%/+7.03%/+1.61%, respectively. The company's single Q4 gross margin was 2.99 pcts to 21.24% year over year. It is estimated that on the one hand, sales were increased, while the return rate was higher than normal due to weak sales and weak controllability of the short-term channel loss rate for new products. On the other hand, the relocation of factories in Shenyang and Qingdao added additional depreciation suppression. In terms of expenses, single Q4 sales/management/R&D/finance expenses were +0.05/-0.44/-0.01/+0.11pcts, respectively, and the overall price was slightly reduced. In addition, the company's 23Q4 tax rate +6.3 pcts to 27.4% year on year also had an impact on profit. In the end, the company's Q4 net interest rate was 2.26pcts to 6.78% year over year, after deducting non-return net interest rate of -2.15 pcts to 6.41% year over year.

Under external pressure, stick to long-term development, and keep an eye on business entering a positive cycle after demand picks up. The company's sales were suppressed by the epidemic in the first two years. There was no significant improvement in demand after the epidemic, mainly due to damage to optional products. On the one hand, the changes in consumer habits were partially shifting to products with diversification, longer shelf life, and channel penetration. On the other hand, the company's traditional dominant channel, husband and wife stores, etc. were impacted by emerging channels, and the turnover and return rates were also at a high level. However, the price of the company's main ingredient, flour, continues to be high, and production continues to expand, so the company's revenue and performance are under pressure. However, the company is also actively exploring and seeking changes, speeding up research and development of new products, increasing China's insurance ratio, and trying to embrace various channels. At the same time, it is firmly expanding production and continuously improving the national production capacity layout to lay the foundation for medium- to long-term development. However, considering that the company's short-term warranty inventory is relatively light, the company is expected to accept it quickly, recover revenue, improve return rates, and form a positive operating cycle.

Investment advice: Short-term pressure remains, we expect stable operation, and give a “recommended” rating. Considering that the price of the company's main ingredient, flour, was still high in 2012, and production capacity was under pressure to climb at the end of 23, we slightly adjusted the 24-26 EPS forecast to 0.38/0.42/0.51 yuan (the value was 0.45/0.53 yuan before 24/25), and the corresponding PE valuation was 18/16/13 times. Under short-term external pressure, the company is still focusing on the long term, consolidating its leading position in short-term insurance, and keeping an eye on the progress of demand recovery. We gave 24 years of 21 times PE, corresponding to a target price of about 8 yuan, and gave it a “recommended” rating.

Risk warning: demand falls short of expectations, production capacity investment falls short of expectations, increased competition, food safety issues, etc.