23 years of performance under pressure, 24 young players

Revenue for 23 was 19.53 billion yuan (-8.3% YoY), net profit attributable to mother was 3.39 billion (YoY -31.4%), and net profit to mother was in line with the previous forecast (forecast net profit of 31.3-3.43 billion yuan for the year 23); of these, 23H2 revenue was 9.80 billion yuan (-15.8% YoY) and net profit to mother was 1.69 billion (-6.9% YoY). The dividend ratio was as high as 70% in '23, which is a significant increase from 48% in the same period last year. Looking ahead to 24, on the revenue side, the infant formula business expects the marginal increase in the number of newborns to bring about a recovery in demand, and the company is resilient as an industry leader and is expected to benefit from increased market concentration after the industry clears; on the profit side, as industry competition becomes rational, the overall price of infant formula is expected to stabilize, and the company's gross margin for 24 years is expected to improve. The company's 24-26 EPS is expected to be 0.36/0.36/0.38. Referring to the 24-year average PE 13x, the company will be given 13xPE for 24 years, and the target price will be HK$5.09 (HK$6.5 previously) to “buy”.

Infant formula is under pressure in '23, and after the industry clears up in '24, we expect the company to take the lead in building back up the company's infant formulation/dairy products (adult powder/liquid milk/baby food supplement, etc.) /nutritional supplements in '23 to achieve revenue of 178.8/1,42/230 million, compared to -10.3%/+23.4%/+2.8% over the same period last year. Overall demand in the infant formula industry was weak in '23. After the introduction of the new national standard, promotion and inventory removal of small and medium-sized brands put pressure on the industry's price market. Under the comprehensive influence, the infant formula industry faced great challenges. As a leading enterprise in the infant formula industry, the company is expected to enjoy the dividends of increased concentration in 24 under the trend of slowing down competition in the industry and a steady recovery in prices. Furthermore, the company's inventory clean-up has basically come to an end, and it is expected to go to battle lightly and take the lead in bottoming out in '24.

The gross margin in '23 is -0.6 pct year on year, and the gross margin in '24 may rise steadily to 64.8% (-0.6 pct year on year), of which the 23H2 gross margin was 64.3% (+0.6 pct year over year), and the 23H2 gross margin returned to the year-on-year improvement channel. By business, the gross profit margin for 23-year infant formula was 69.4% (+0.6pct year on year), the gross profit margin for other dairy products was 8.3% (-4.1pct year on year), and the gross profit margin for nutritional supplements was 57.5% (+15.6pct year on year). The 23-year sales expense rate was 34.3% (+3.6pct year over year), mainly due to an increase in advertising expenses; the corresponding 23H2 sales expense ratio was 33.2% (+3.9 pct year over year).

The 23-year management fee rate was 9.0% (+1.8pct year over year); the corresponding 23H2 management fee rate was 10.3% (+2.7 pct year over year). The final net interest rate for 23 years was -5.8pct to 17.4%; the corresponding 23H2 net interest rate was -5.8pct to 17.3% yoy. The company's dividend payout rate in '24 was 70%, a significant increase over the previous year.

Looking forward to subsequent improvements and maintaining the “buy” rating

Considering that demand in the infant formula industry is still weak in the short term and competition in the industry is still fierce, we lowered our profit forecast. We expect EPS of 0.36/0.36 yuan (the previous time of 0.61/0.68 yuan) for 24-25, and the introduction of EPS of 0.38 yuan for 26 years, giving the company 13xPE for 24, with a target price of HK$5.09 to maintain “purchase”.

Risk warning: Downside risks: 1) the number of newborns in China continues to decline; 2) increased competition in the goat milk powder market; 3) unfavorable changes in the foreign exchange rate ratio; 4) food safety issues. Upside risks: 1) Consumer demand for terminal milk powder is improving; 2) The recovery of the milk powder business is accelerating.