Incident: Weilong released its 2023 annual report and achieved operating income of 4.87 billion yuan, +5.2% year over year; net profit to mother of 800 million yuan, +481.9% year over year. Among them, 23H2 achieved operating income of 2.5 billion yuan, +6.0% year on year; net profit to mother of 430 million yuan, +5.1% year over year.
Demand for spicy bars is still weak, and vegetable products are growing rapidly.
1) By product: Seasoned noodles/vegetables/soy products and other products achieved revenue of 25.49/21.19/ 204 million yuan in 2013, -6.23%/+25.11%/-7.43% year-on-year. The year-on-year decline in revenue from seasoned noodle products was mainly due to the decline in offline traditional channel traffic due to weak demand; the relatively rapid year-on-year increase in revenue from vegetable products was mainly due to the company's continuous iterative upgrading of this product and expanding production capacity to ensure product supply.
2) By channel, offline/online channels achieved revenue of 43.61 billion yuan in '23, or +5.19%/+4.97% year-on-year. The company actively embraces channels such as mass sales of snacks, but the growth rate of offline revenue is still relatively slow, mainly due to the increase in revenue from emerging channels such as O2O and mass snack stores, which is partially offset by the decline in revenue from traditional offline channels due to declining traffic. Online companies keep up with changing platform traffic trends and actively seize revenue growth opportunities brought by content e-commerce and other traffic ports represented by Douyin.
3) Looking at the subregion, East China/Central China/North China/Southwest/Northwest/Overseas achieved revenue of +10.28%/-5.92%/+0.15%/+12.84%/+12.44%/-1.77%/+49.10%. The company accelerated overseas market promotion and achieved rapid growth in overseas business under a low base. By the end of 2023, the number of the company's dealers reached 1,708, a decrease of 139 from the end of 2022.
Gross margin increased due to changes in product structure and lower raw material costs, and the dividend ratio increased significantly in '23.
The company's gross margin in 2023 was 47.68%, +5.37pcts year-on-year. The increase in gross margin was mainly due to a decrease in raw material costs, an increase in the share of vegetable products with high gross margin, and optimized cost management. The sales expense ratio in 2023 was 16.56%, +2.89pcts year over year, mainly due to the increase in the company's online advertising activities such as outdoor media placement and e-commerce platforms; as well as the year-on-year increase in sales staff employee benefits due to the increase in the size of the sales team. In 2023, the management fee rate was 9.42%, -0.98 pcts year over year, mainly due to increased employee benefit expenses and reduced special expenses and listing expenses. Taken together, the company's adjusted profit margin in '23 was 19.92%, +0.21pcts year on year, and profitability was steady. The company drastically increased its dividend ratio in '23. The basic dividend ratio was raised from 30% in '22 to 60%, and the special dividend ratio was 30% as it was in '22. In the future, the company will maintain the basic dividend ratio above 60% as much as possible.
Actively embrace new channels such as mass sales of snacks, and accelerate the search for new growth.
At the beginning of 2023, Weilong increased its investment in snack sales channels. From August to September 2023, Weilong sold 371,800 boxes and 433,700 boxes of products on this channel, covering all categories. Sales increased by 38.1% and 16.7%, respectively. In October, 422,200 boxes were sold, a slight decrease of 3.1% over the previous month. Weilong targets medium- to long-term snack channels to contribute 10% to 20% of the company's revenue. In 2023, the company launched the new spicy strip “Overbearing Panda” (launched in September), the new konjac product “Little Witch” (launched in October), and the new product “Crispy Fire” spicy chips, which significantly accelerated the pace of promotion. In '24, the company expects the revenue share of the snack sales channel to increase from single digits to double digits, and the revenue contribution of the three major new products is expected to rise to a high unit number to a double digit level. It is recommended to focus on the performance of new products and the development of snack mass sales channels.
Profit forecast, valuation and rating: Considering weak demand for spicy bars, we lowered Weilong's 2024-2025 net profit forecast to $1,050/1,229 million yuan (down 10%/6%, respectively) and introduced a net profit forecast of 2026 billion yuan. The current stock price, corresponding to 2024-2026 PE, is 12x/10x/9x respectively. Spicy foods are naturally addictive, user stickiness is strong, and growth is relatively stable. As a leader, the company is expected to benefit from industry growth and maintain an “gain” rating.
Risk warning: food safety risks, risk of changes in consumer demand, risk of increased competition in the industry.