Event: The company publishes its 2023 annual report. In '23, the company's revenue was 251,524 billion yuan, -2.32% year on year; net profit to mother was 2,848 billion yuan, -5.43% year on year; net profit after deduction was 1,321 billion yuan, or -58.50% year on year. Looking at a single quarter, 23Q4's revenue was 63.01 billion yuan, -9.54% year on year; net profit to mother was 719 million yuan, +9.24% year over year; net profit after deduction was 412 million yuan, or -55.45% year on year.

Affected by falling prices for major products, the company's performance in '23 was slightly pressured. The reason for the decline in the company's revenue & performance in 2023 was mainly due to the impact of falling product prices exceeding the revenue contribution brought about by the increase in sales volume; the change in net profit after deduction was mainly due to the impact of profit and loss of derivative financial instruments and structured deposits that did not fully meet hedging requirements. The company's comprehensive gross profit margin in '23 was 4.83%, -0.84pct year on year; the cost ratio for the period was 3.95%, -0.03pct year on year. Looking at a single quarter, the 23Q4 company's comprehensive gross profit margin was 5.12%, +0.01pct year on year; the cost ratio for the period was +3.96%, +0.47pct year on year.

Kitchen food sales increased 8% year over year, and gross margin declined slightly. In '23, the company's kitchen food business sold 232.18 million tons, +8.23% year on year; unit price was 6,359 yuan/ton, -13.18% year on year; gross margin was 6.41%, -0.27pct year on year. By channel, (1) retail: benefiting from lower raw material costs, product gross profit margin and profit increased year-on-year in '23. (2) Catering and food industry: Sales increased significantly in 23 years, and the decline in profit was mainly dragged down by the decline in flour business performance. The main reasons were the overall decline in H1 wheat and product prices, the company consumed early high-priced wheat inventory; poor terminal consumer demand; the increase in the industry's wheat processing capacity combined with increased concentration, making the industry competitive fierce. Looking at the sales model, the company's kitchen food distribution and direct sales revenue in '23 accounted for 49.5% and 50.5%, respectively, of which the distribution share increased by 2.5 pct; in terms of gross margin, the gross margin of distribution increased by 0.98 pct, and the gross margin of direct sales decreased by 1.51 pct. The total number of the company's dealers in '23 was 2,867, +7.42% year-on-year, mainly in the north, central and southern regions. The company attaches great importance to high-end, branding and local specialization strategies, compounding the long-term trend of consumption upgrading. We expect the kitchen food business to achieve restorative growth in the future. Furthermore, the company continues to promote the ecological industrial chain of central cooking. Currently, it is still in the early stages of business. In the future, as capacity utilization gradually increases, it is expected to create a new business growth pole.

The profits of feed raw materials and oil technology have increased significantly, and downstream demand is expected to improve. The sales volume of the company's feed raw materials and oil technology business in '23 was 268.74 million tons, +13.77% year on year; unit price was 3805 yuan/ton, -8.86% year on year; gross margin was 2.19%, -1.62 pct year on year. Affected by the tight domestic soybean supply in Q3 and the recovery in soybean meal prices, the company's pressing profit increased a lot year on year, and the company's feed ingredients business profit increased sharply year on year in '23. On the demand side, based on the derivation that can breed sows & fat pigs, we think the average annual price of pigs in '24 may rise year on year. Among them, the overall price of 24H2 pigs may be better than H1. The improvement in profit expectations of downstream farming companies is expected to support soybean meal consumption and prices, which will further enhance the profitability of the company's feed ingredients and oil technology business.

Investment suggestions: The company's improved brand matrix, comprehensive channel network, rich product line, strict quality control, combined with attention and implementation of changes in consumer demand such as consumption upgrades, branding, and customization, the company's high-end products and customized products may continue to benefit and promote the recovery of the company's profitability. We expect the company's EPS in 2024-2025 to be 0.71 yuan and 0.94 yuan, respectively, and the corresponding PE will be 44 and 33 times higher, maintaining the “recommended” rating.

Risk warning: risk of fluctuations in raw material supply and prices; risk of consumption recovery falling short of expectations; risk of food safety; risk of policy changes, etc.