The 2023 results fell slightly short of our expectations
The company announced 2023 results: revenue of 80.42 billion yuan, +2.2% year on year, net profit to mother of 3.12 billion yuan, +18.4% year on year; corresponding 2H23 revenue of -2.4% year on year, net profit of 1.48 billion yuan, +7.3% year on year. The results were slightly lower than our expectations, mainly due to weak demand and higher rates.
Development trends
2H23 sales performance declined, and sales in the beverage sector were ahead of schedule, and instant noodle sales were under slight pressure. 2H23's revenue growth decelerated month-on-month compared to 1H23. By sector: 1) Beverages: 2H23 revenue was +1.2% year-on-year, and +5.4% year-on-year, mainly due to the influence of the trend in annual beverage sales and lackluster 2H demand; by category, the year-on-year growth rates of tea, carbonated juice and water in 23 were 7%, 2.9%, 4.5%, and 9.8%, respectively. Apart from carbonated beverages, which were disrupted by weak demand in segmented market segments, all categories grew steadily; 2) Instant noodles grew steadily year-on-year -7.7%, year-on-year view -2.8%, The main reason is the weak overall consumption environment and the decline in the number and spending power of migrant workers entering the city, which is one of the instant noodle consumers, affecting instant noodle sales; the company's sales performance was better than the industry in '23, and its share increased year-on-year, demonstrating the company's operational resilience as a leader.
Benefiting from lower costs and improved gross margin, rate increases offset some of the benefits. In addition to the impact of higher sugar prices on the gross margin of beverages in 2H23, the prices of other major raw materials are favorable, including palm oil, PET, etc. 2H23's gross margin was +0.5ppt year over year, and the gross margin of instant noodles/beverages by category was +1.4/-0.3ppt. In terms of expenses, due to 2H23's sales being weaker than expected, the expense ratio showed a slight passive upward trend. Sales/management rates were +1.1/+0.2ppt, respectively. Overall, 2H23's profit margin increased slightly by 0.3 ppt year over year.
The outlook for 2024 is solid, and the dividend ratio is attractive for investment. According to the company's public results conference, 1Q24 benefited from Spring Festival preparations and travel, and the company's sales were basically in line with expectations. We expect the company's revenue to achieve medium to low single-digit year-on-year growth in 24. Among them, the beverage industry is expected to maintain middle single-digit growth, benefiting from the immediate demand for going out, while instant noodles are expected to maintain steady growth in a lower base in 23. The company launched the jasmine green tea sugar-free version (3 yuan) and the pure extract zero sugar series (4 yuan) to lay out a sugar-free tea circuit. It is expected to launch a 5 yuan sugar-free product this year. We judge that sugar-free products are expected to contribute additional growth in the future. On the cost side, with the exception of the recent month-on-month increase in palm oil prices, the prices of other raw materials have remained relatively stable. We expect the company's various costs to remain stable in 24, and the upward pressure on comprehensive costs will be limited; considering cost control, we expect profit margins to increase slightly. Looking at the company's fundamentals as a whole, considering that the company is expected to maintain a 100% dividend rate unchanged, corresponding to a 24-year dividend rate of about 7.7%, the dividend rate is very attractive.
Profit forecasting and valuation
The company traded at 13/12 times 24/25 P/E. Considering weak demand, the 24-year profit forecast was lowered by 3.1% to $3.37 billion, basically maintaining the 25-year profit forecast; maintaining the target price of HK$10.5, which corresponds to 16/14 times the 24/25 P/E and 20.4% upward space. Maintain an outperforming industry rating.
risks
Weak demand; increased competition; fluctuating raw material prices.