Core views:

Event: The company announced its full year 2023 results. In 2023, the company's revenue was 98.624 billion yuan, +6.51% year-on-year; net profit to mother was 4.809 billion yuan, -9.31% year-on-year.

Liquid milk continues to grow steadily and continues to drive structural upgrading. By product: In 2023, Mengniu liquid milk revenue was 82,071 billion yuan, +4.86% year over year, 2023H2 liquid milk +4.73% year over year. Among them, Trensu still achieved relatively rapid growth throughout the year, and the organic series continued to grow by 10% +, driving structural upgrading; room temperature acid is expected to remain under pressure, and low temperature acid has bucked the trend. Ice cream/milk powder/cheese revenue in 2023 was 6.026 billion yuan/3.802 billion yuan/4.357 billion yuan respectively, +6.61%/-1.56%/+299.81% over the same period last year. The high increase in cheese was mainly due to Miracorando's contribution.

Expenses increased during the period when milk prices declined, and operating profit margins increased as scheduled. Benefiting from declining milk prices and structural upgrades, the company's gross margin increased by 1.85pct to 37.15% year-on-year in 2023. During the period of declining milk prices, the company stepped up offline marketing and promotion efforts. The sales expense ratio was +1.41 pct to 25.54% year on year, and the product promotion fee rate was +1.69 pct year on year; the administrative expenses rate remained flat. The company's net profit declined year on year in 2023, mainly due to the impact of the increase in withholding tax due to the impairment of the value of large bags and overseas dividends; the company's operating profit margin was +0.40pct year on year, in line with the previous profit margin increase target.

Profitability is expected to gradually improve, and the dividend ratio will increase to 40%. Looking ahead to 2024, the company will continue to promote channel concentration and product upgrades. The revenue side is expected to achieve medium to low single-digit growth, and profit margins are expected to gradually increase. The company plans to increase the dividend ratio to 40% in 2023 (30% in 2022), with a cash dividend ratio of +21.03%. Leading Dairy's potential for high dividends is gradually showing.

Profit forecasting and investment advice. Mengniu's net profit for 24-26 is estimated at $55.03/61.47/6.763 billion yuan, +14.43%/+11.71%/+10.02% year-on-year. Referring to comparable companies, a PE valuation of 15 times in 2024 was given, corresponding to a reasonable value of HK$22.80 per share, maintaining a “buy” rating.

Risk warning. Product upgrades fall short of expectations; rising raw material costs; food safety risks.

Note: Unless otherwise indicated, RMB is used as the currency unit, and the HKD/RMB exchange rate is 0.92.