The company released its 2023 annual report. Revenue/net profit was +1.1%/-10.3% YoY. Revenue was stable, and the decline in profit was mainly due to low capacity utilization. In '24, the company focused on stability, maintained the pace of new production capacity investment and diversified channel layout, and looked forward to a recovery in domestic demand in '24. The cost side is affected by the increase in new depreciation. Manufacturing costs are expected to rise slightly, and net interest rates are expected to rise or be under slight pressure. Focus on the improvement in profit margins as capacity utilization recovers. We expect the 24-25 EPS forecast to be 0.36 and 0.36, corresponding to the 24-year PE19.1X, maintaining the “Highly Recommended” rating.

Incident: The company released its 2023 annual report, with 23 years' revenue/profit/net profit of 6.76 billion/570 million/550 million, respectively, +1.1%/-10.3%/-12.3% year-on-year. Single Q4 revenue/profit/net profit after deduction of non-return to mother profit was 1.69 billion/ 110 million/110 million, respectively, +2.0%/-23.6%/-23.7% year-on-year. The company's 23Q4 cash repayment was 1.95 billion yuan, up 2.2% year on year, slightly higher than the revenue growth rate. Net operating cash flow was 160 million yuan, down 35.1% year on year, and cash mainly purchased for goods and received labor payments increased. The company plans to pay a cash dividend of 1.8 yuan (tax included) for every 10 shares, with a dividend ratio of 50.16%.

The main bread business grew slightly in '23, and the growth rate of the main business improved month-on-month under the low Q4 base. Bread and confectionery revenue increased 0.6% year on year in '23. Among them, sales volume was +0.7% year over year, unit price per ton remained flat year on year, and cost per ton was +1.4% year over year. The cost increase was mainly due to increased depreciation and rising manufacturing costs and labor costs, and raw material costs were basically stable. Revenue from rice dumplings, mooncakes, and other products was +27.8%/6.9%/49.9%. The main Q4 bread business achieved revenue of 1.702 billion yuan, up 3.75% year on year, and the growth rate improved month-on-month under a low base.

The performance of the Northeast China base market is still under pressure; East China and central China are relatively good. There is still pressure on the subregion's performance in Northeast China; East China and Central China are relatively good. The Northeast China region's revenue in '23 was -2.3% YoY (share fell to 42%), East China/North China revenue was +6.9% /flat (31%/23%, respectively), Central China and Northwest China revenue was +2.0%/+1.3% YoY, and Southwest China -3%/-15% YoY. The large decline in South China was mainly due to accounting offset adjustments between divisions. Looking at Q4 alone, Southwest China and Northwest China recovered, +2.9%/+6.2% YoY, Northeast China revenue -3.1% YoY, North China/South China/Central China/East China revenue -9.5%/-76.6%/-18.6%/-1.3% YoY. The company continues to develop new markets in East China and North China, while increasing its efforts to develop the northwest market. The number of dealers increased by 9, 12, and 20 respectively during the year.

Decreased capacity utilization and high return rates affected gross profit margins. Net profit margin was -1.1% year-on-year. New factories in Shenyang, Qingdao, and Quanzhou were put into operation. The overall capacity utilization rate was low (down from 81% in '22 to 74% in '23), compounded by weak demand and a high return rate. The company's gross margin fell 1.2 pct year on year in '23, the cost ratio was stable, and the annual net interest rate was -1.1%. The gross margin of a single Q4 company decreased by 3.0 pct year on year, mainly due to the fact that the new production capacity was not fully released and the upfront costs were high. The management expenses ratio was -0.4% year over year. In Q4, the net interest rate was 6.78%, down 2.27 pct year on year.

Mainly stable in '24, I expect the growth rate of the main business to resume. The company's revenue and profit growth targets in '24 were +5%. Affected by the weak recovery in demand for short-warranty bread, the main business increased slightly in '23. In '24, the company maintained the pace of new production capacity investment, diversified channel layout, and improved the construction of weak market outlets. Currently, the company has a total production capacity of 500,000 tons, and the Guangxi, Changchun, Henan, Shanghai and Foshan plants are still under construction, with a total of 220,000 tons. It is expected that the demand side will gradually improve, and the capacity utilization rate will improve. On the cost side, the prices of flour and fats are basically stable, and raw material costs are expected to maintain a stable trend in 24 years.

Investment advice: Demand in the bread industry is under pressure, focus on capacity utilization recovery, and maintain a “highly recommended” investment rating. Revenue/net profit in '23 was +1.1%/-10.3% YoY. Revenue was stable, and the decline in profit was mainly due to low capacity utilization. In '24, the company focused on stability, maintained the pace of new production capacity investment and diversified channel layout, and looked forward to a recovery in domestic demand in '24. The overall trend of raw material prices on the cost side is stable. Affected by the increase in new depreciation, manufacturing costs are expected to rise slightly, and net interest rates are rising or under slight pressure. Focus on improving profit margins as capacity utilization recovers. We expect the 24-25 EPS forecast to be 0.36 and 0.36, corresponding to the 24-year PE 19.1X, maintaining the “Highly Recommended” rating.

Risk warning: macroeconomic impact, intensification of industry competition, impact of channel changes, sharp rise in costs, demand recovery falling short of expectations, etc.