The company's growth in tea and beverage in 2023 exceeded expectations. Oriental Leaves benefited from increased distribution rates and the contribution of large packaged products, and the share of beverage revenue surpassed packaged water for the first time. Thanks to excellent cost control capabilities and structural contributions, the company's net interest rate reached a new high. Looking ahead to 24 years, the short-term turmoil will continue to sink into the market. It is expected to continue to be driven by growth in the next 1-2 years. Profit performance is expected to continue to exceed expectations due to structural contributions. We gave 24-25 EPS forecasts of RMB 1.28 and 1.49, and a target price of HK$50, corresponding to 35 times PE in 24 years, and raised to a “Highly Recommended” rating.

Incident: The company disclosed its 2023 results announcement. In 2023, it achieved revenue of 42.67 billion yuan, an increase of 28.4% over the previous year, and achieved net profit of 12.08 billion yuan to mother, an increase of 42.2% over the previous year. Among them, H2 achieved revenue of 22.20 billion yuan, a year-on-year increase of 33.4%, and realized net profit of 6.30 billion yuan, an increase of 62.2% over the previous year. Revenue and profit growth exceeded expectations. The company plans to pay a dividend of RMB 0.75 per share in 2023, totaling approximately RMB 8.43 billion, with a dividend ratio of about 70%.

Oriental leaf growth exceeded expectations, and the share of beverages surpassed packaged water for the first time. In 23 years, packaged water/tea drinks/energy drinks/juice drinks/other products achieved revenue of 202.6/126.6/35.3/1.31 billion yuan respectively, +10.9%/+83.3%/+27.7%/+22.7%/-3.2%/-3.2%/-3.2%/-3.2%, respectively. The growth of tea drinks accelerated significantly. The growth of tea drinks accelerated significantly, mainly because Oriental Leaf exceeded expectations, and the sugar-free tea trend was the first brand to benefit the most. The company continues to promote an increase in the distribution rate of Oriental leaves. In '23, it launched a new flavor of black oolong and a new 900ml beverage package. Large packages meet the drinking needs of more scenarios. After the pandemic, screams benefited from the spread of the electrolyte water concept. Vitamin Water launched two new, more trendy flavors, and the growth rate of energy drink revenue recovered. The growth rate of juice drinks slowed in the second half of the year. To a certain extent, it was affected by the late Spring Festival. Farmer orchards and NFC juice holiday drinking scenes are more common, and the decline in revenue from other products is mainly due to the company's focus strategy. Driven by the rapid growth of tea drinks, the company's share of beverage revenue surpassed packaged water for the first time in 2023.

The net interest rate reached a new high, and the structural contribution is worthy of attention. In '23, the company achieved a gross profit margin of 59.6%, a year-on-year increase of 2.1 pcts (H2 increased 3.3 pcts), mainly benefiting from the reduction in procurement costs for cartons, labels and some raw materials. Benefiting from supply chain optimization and the reduction in logistics and warehousing costs, the sales expense ratio decreased by 1.7 pcts in '23 (H2 decreased by 4.6 pcts), the management expense ratio decreased by 5.1%, down 0.5 pcts year on year, achieved a net profit margin of 28.3% in '23, an increase of 2.8 pcts year on year, and reached a new high. The high margin was mainly related to cost fluctuations and the doubling of tea drinks in the second half of the year. In addition to the company's excellent ability to control costs and expenses, we believe that the structural contribution is also worth paying attention to. Judging from the segment performance, the operating profit margins of the packaged water/ tea drink/ energy drink/ juice drink segment were 36.3%/44.4%/42.2%/26.8%, respectively, up 1.0/4.5/2.2/6.6pcts over the previous year. The beverage business is more profitable and growing faster, and each category's own production and distribution efficiency is also improving, which resonates with many benefits.

24-year outlook: Tea beverages continue to sink and profitability remains stable. The company maintained a double-digit growth target in all categories in '24. Sales have been in line with expectations since the beginning of the year. The public opinion storm in March had a short-term impact on e-commerce, supermarket and other channel sales. Considering that Oriental leaves are still rapidly sinking and the growth rate of energy drinks and juice drinks is recovering, it is expected that revenue will continue to grow rapidly throughout the year. On the profit side, the cost of raw materials such as PET does not fluctuate much. The company will lock prices according to market conditions, and the gross margin is expected to be stable for 24 years. Although competition for sugar-free tea is intensifying, the company is more cautious about investing in prices. Considering the positive structural contribution, the net interest rate is expected to remain stable in 24 years.

Investment advice: Short-term turbulence will not change long-term competitiveness, performance continues to exceed expectations, and valuation has been raised to “Highly Recommended”. Public opinion turbulence may affect short-term sales, but the company has long insisted on investing in product development, channel construction, and consumer education, and its core competitive advantage has not changed. There is still a gap between Oriental Leaf's current distribution rate and the industry's leading brands. It is expected to continue to penetrate the market. It is expected to continue to drive growth in the next 1-2 years. Profit performance is expected to continue to exceed expectations due to structural contributions. We gave 24-25 EPS forecasts of RMB 1.28 and 1.49, and a target price of HK$50, corresponding to 35 times PE in 24 years, and raised to a “Highly Recommended” rating.

Risk warning: New product development falls short of expectations, rising raw material costs, increased industry competition, and the impact of public opinion turmoil.