Matters:

The company released its 2023 report and achieved annual revenue of 4,049 billion yuan, a year-on-year decrease of 16.16%; net profit to mother was 63 million yuan, a year-on-year decrease of 53.90%. Net profit not attributable to mother was realized at least $0.7 billion, a year-on-year decrease of 89.63%. Of these, 23Q4 achieved operating income of 974 million yuan, a year-on-year decrease of 2.65%; net profit to mother was 0.3 billion yuan, turning a year-on-year loss into a profit. Due to the negative undistributed profit in the company's consolidated statement at the end of 2023 and the parent company's statement, the company does not plan to distribute cash dividends in 2023 and not implement stock transfers or capital reserve transfers to increase share capital.

Ping An's point of view:

Costs and exchange rates are fluctuating, putting pressure on the profit side. The company achieved a gross profit margin of 29.14% for the full year of 2023, a year-on-year decrease of 4.95pct. The main reason was the year-on-year increase in the cost of major raw materials while the company's business revenue declined. Coupled with fluctuations in the RMB exchange rate, the gross margin declined year-on-year. The company's sales/management/financial expense ratios for the full year of 2023 were 23.18%/3.66%/0.63% respectively, down 2.06/down 1.38/ up 1.05pct from the same period. Affected by a decrease in locked foreign exchange earnings and an increase in net interest expenses, 23H1 achieved a net interest rate of 1.97%, a year-on-year decrease of 1.57pct. Faced with market changes, the company actively adjusted its business strategy and deployed a series of measures to respond positively to market changes in various ways. According to the Kantar Consumer Index household sample group, the company's share of the cheese market has further increased, ranking first in the industry.

The “focus on cheese” strategy is firm, and the business structure is continuously optimized. The company firmly pursues the overall strategy of “focusing on cheese” to develop and expand the cheese business. In 2023, the cheese sector achieved revenue of 3.137 billion yuan (accounting for 77.69%), a year-on-year decrease of 18.91%. The decline in the second half of the year was narrower than in the first half of the year.

The cheese sector achieved a gross profit margin of 37.01% for the full year of 2023, a year-on-year decrease of 3.72 pcts. Due to the double fluctuation of raw material market conditions and exchange rates, the cost of major raw materials increased compared to the same period last year, leading to a year-on-year decline in the gross margin of the company's cheese sector. The company made strategic adjustments to the trade business, implemented a merger of trade and raw material procurement, and shifted its business focus to cheese and butter. In 2023, the company's trade business achieved revenue of 567 million yuan (accounting for 14.04%), a year-on-year decrease of 5.44%. Due to the double impact of the cost of major raw materials and exchange rates, the gross profit margin of the trade business declined, achieving a gross profit margin of -2.70% for the whole year, a year-on-year decrease of 8.80 pcts. Overall, however, the share of revenue from the trade business is stable, and the business structure continues to be optimized. According to the overall strategic plan of “focus on cheese”, the operating income of liquid milk gradually declined. In 2023, the company's liquid milk business achieved revenue of 334 million yuan (accounting for 8.27%), down 4.32% year on year; gross profit margin was 9.25%, up 0.64 pct year on year.

Financial forecasting and valuation: Considering the slowdown in consumer consumption recovery, cheese still needs to pay attention to demand recovery as an optional consumer product. According to the company's 2023 report, we adjusted the performance forecast. The company's net profit for 2024-2026 is expected to be 168 million yuan (previous value: 187 million yuan), 252 million yuan (previous value: 283 million yuan), 363 million yuan (new), EPS is 0.33/0.49/0.71 yuan, respectively. PE corresponding to the closing price on March 25 was 40.5, 27.0, and 18.8 times, respectively. Currently, the company's valuation is at a historically low level, and at the same time, the fundamentals improve month-on-month and are highly deterministic, maintaining the “recommended” rating.

Risk warning: 1) Food safety risk: The company has many participants in the dairy industry chain and the circulation process is long. If food safety issues occur, they may have a significant adverse impact on the company's reputation and business operations, and even affect the entire industry. 2) Increased competition in the industry: China's cheese market is currently in a nurturing period. In particular, the children's cheese bar industry is characterized by high profit margins and high growth rates, triggering competitors from all sides to enter the market. Overall, we believe that the addition of more participants can jointly promote consumer education and drive an increase in the overall market size, but as the cheese industry matures, there is still a risk that market competition will intensify. 3) The increase in sales expenses exceeds expectations: Currently, competitors in the children's cheese stick market are investing heavily. This is a characteristic of the early stages of the industry's development, and the cost rate will gradually decrease in the future due to scale effects. If competition in the industry intensifies or there is a price war situation, there is a risk that the increase in sales expenses will exceed expectations. 4) Risk of fluctuations in raw material prices: The main raw materials required for the company's production come from international market procurement, and price fluctuations in the international bulk raw materials market will directly affect product profits and the company's cash flow.