Key points of investment:

Deeply involved in the halogenated products industry for more than 30 years, with declining costs and improving operations. The company was founded in 1993. Its main business is braised meat products with sauce, quick consumption food with cold dishes, and rice products. Although the company's revenue fluctuated somewhat from 21-22, the company actively expanded stores and promoted the recovery of single-store revenue. The largest business, fresh food revenue, showed an upward trend. 23H1 fresh product revenue was +1.71% year-on-year. In terms of costs, raw material prices began to fall back into the downward channel at the end of the first quarter of '23. The company's gross margin improved quarterly. The gross margin reached 31.30% in the 2023Q3, +4.70 pcts compared to the previous month. As the consumption of the company's high-priced inventory and duck costs remain low, there is room for further improvement in future gross margin.

The marinated food industry has a broad space, and concentration is expected to continue to increase. According to the “2023 Braised Cooked Food Industry Development Report”, China's casual marinated food market is expected to reach 184.8 billion yuan in 2023. Furthermore, according to the Forward-looking Industry Research Institute, industry concentration is low. CR3 in 2020 was 9.57%, and Huangshanghuang ranked second, with a market share of 2.11%. Individual braised stores are less resilient to risks and food safety risks. In the future, leading companies are expected to enhance their competitive advantage through brands, production processes, supply chain, logistics, and quality management, and industry concentration is expected to increase.

Build the advantages of the entire industry chain and build a brand matrix. At present, the company has formed a model for the development of the entire industry chain, including breeding, slaughter, processing, R&D, cold chain distribution, and chain sales, and has the advantage of industrialization. In addition, the company has three major brands. Among them, “Huangshanghuang” has high brand recognition and has core differentiated products with sauce duck; the “Dokujiao” brand focuses on young consumers, focusing on grilled pork trotters; and the “True True Old” brand is positioned as a “supporter of fresh rice dumplings with broth”, which will be based in the base camps of Jiangsu, Zhejiang and Shanghai to create an exclusive regional brand.

Accelerate store expansion and promote the development of online channels. As of 2023H1, the total number of the company's offline chain stores reached 4,213. The dominant regions were mainly Jiangxi and Guangdong, with stores in second-tier cities accounting for a relatively high proportion. The company plans to implement the strategy of ten thousand stores, accelerate the expansion of stores by deepening the dominant old market and vigorously expanding key new markets around the newly built processing base. At the same time, with the remarkable trend of new retail and new media operations in China, the company is vigorously developing its online business. Starting in 2022, it will launch Douyin and takeout platforms to import online traffic into stores and convert it into sales. In 2023, H1 achieved GMV of 246 million yuan, accounting for 18.72% of sales.

Profit forecast and investment advice: The company's net profit is expected to reach 0.71/1.70/230 million yuan in 2023-2025, with a year-on-year increase of 129%/141%/35% over three years. Considering the company's accelerated expansion of stores and active development of online business, costs have declined and operating improvements have been obvious. The 24-25 year performance is expected to grow rapidly, giving the company 32 times PE in 2024, corresponding to a target price of 9.77 yuan/share. For the first time, coverage gives the company a “holding” rating.

Risk warning: Store expansion falls short of expectations; industry competition intensifies; food safety risks; raw material prices fluctuate greatly; performance falls short of expectations and the risk of negative impact on valuation premiums.