Incident: Peach and Plum Bread released its 2023 annual report. In 2023, the company achieved revenue of 6.759 billion yuan, a year-on-year increase of 1.1%, and realized net profit of 574 million yuan, a year-on-year decrease of 10.3%. Among them, Q4 achieved revenue of 1,692 billion yuan, an increase of 2.0% over the previous year, and realized net profit of 115 million yuan, a year-on-year decrease of 23.6%. The performance was in line with market expectations.

Core business growth is sluggish, and the long-term and short-term response is to promote new products+expand production capacity. In 2023, the company's bread and pastries, mooncakes, rice dumplings/other revenue was 65.32/1.49/0.17/60 billion yuan, up 0.6%/6.9%/27.8%/49.9% year-on-year. The revenue growth rate of the core bakery business is still under pressure. On the one hand, the overall consumption environment needs to be repaired. On the other hand, the company has partial insurance and supply requirements in 2022, and the revenue base is relatively high. In terms of categories, on the basis of a steady increase in revenue from original star products such as well-cooked, the company has continuously strengthened the development of new products, launched new bread according to the plan, and launched various types of mooncakes and rice dumpling gift boxes to meet consumer needs. The staple foods are biscuits bread and salty egg yolk doodle bread. Looking ahead to 2024, performance is expected to continue to improve as the company promotes new products, implements production capacity, and focuses on building a national production base layout.

Focus on developing new markets and actively embrace multiple channels. In 2023, the company's core region of North China/Northeast China/East China achieved revenue of 15.22/28.28/2,094 billion yuan, a year-on-year change of +0.0%/-2.3%/6.6%. In terms of number of dealers, the number of dealers in North China/Northeast China at the end of 2023 was 183/276/246, a net increase of 12/2/9 over the previous year. Revenue growth in the two mature markets of North China and Northeast China has been slow year-on-year. The company is focusing on developing markets in East China, Central China, and Northwest China, which has led to a steady increase in sales. In terms of channels, the company actively expands online consumer business, deeply participates in client platform cooperation, develops O2O and new retail businesses, and establishes a digital marketing platform integrating multiple online and offline channels.

Profitability is under pressure, and there is room for improvement. In 2023, the company's gross margin was 22.79%, down 1.20 pcts year on year. The main reason was the year-on-year increase in the price of some raw materials, as well as the fact that production capacity was not fully released after some new construction projects were put into operation and the upfront costs were high. In Q4 2023, the company's sales/management expenses ratio changed +0.05/-0.44pcts to 8.39%/1.94%, and overall expenses subsided. Among them, financial expenses in 2023 increased 122.96% year on year, mainly due to an increase in interest expenses on current loans. Overall, in 2023, the company achieved a net return rate of 8.49%, a year-on-year decrease of 1.08pcts, and a year-on-year decrease of 6.78% in 23Q4, a year-on-year decrease of 2.27pcts. We believe that there is still plenty of room to reduce the company's costs. As production capacity continues to climb, the cost of new construction projects is expected to continue to be diluted in the future, future mature channels and peripheral markets are expected to reduce the overall loss rate, and there is still room for improvement in the company's net interest rate.

Profit forecast, valuation and rating: Considering that short-term consumption is still under pressure, we lowered the 2024-25 net profit forecast to mother to 598/668 million yuan (down 24%/24% from the previous one) and added the 2026 net profit forecast to 702 million yuan. The PE corresponding to the current stock price is 17/16/15 times, and downgraded to the “increase” rating.

Risk warning: Raw materials continue to rise, channel expansion falls short of expectations, and new product promotion falls short of expectations.