Incident Overview

The company issued a performance announcement. In 2023, it achieved total revenue of 98.62 billion yuan, +6.5% year on year, net profit of 4.81 billion yuan, -9.3% year on year; 23H2 achieved total operating income of 47.51 billion yuan, +5.9% year on year, and net profit of 1.79 billion yuan, +15.3% year over year. Revenue performance is in line with market expectations.

Analytical judgment

Revenue is in line with expectations, and liquid milk maintains medium single-digit growth

23FY/23H2 liquid milk was +4.7% year over year respectively. Among them, liquid milk achieved mid-single digit growth in both the first half of the year. Among them, we determined that the growth rate of trensu exceeded the growth rate of liquid milk (driven by high-end growth rate recovery+low-end short-term promotion), and that the growth rate was higher than white milk. Fresh milk maintained a double-digit growth trend. The month-on-month trend of low-temperature yogurt is expected to achieve a single-digit growth rate throughout the year. The future is expected to focus on the functionalization of yogurt.

23FY/23H2 ice cream achieved mid-single digit growth over the same period of +6.6%/-1.8%, respectively. We believe that the main reason was that the second half of the year dragged down the growth rate; after experiencing capacity layout and brand promotion, the overseas ice cream business also ushered in good growth potential. After experiencing capacity layout and brand promotion, Ai Xie had high revenue and profit growth. Indonesian brand share ranked first, and the Philippines ranked third, and achieved growth exceeding expectations, and actively expanded the Central and Southern Peninsula markets such as Vietnam and Thailand.

23FY/23H2 milk powder was +1.6%/+6.6%, respectively. Milk powder was still under pressure against the backdrop of a continued decline in the number of newborns. Bellamy seized the recovery opportunities of cross-border channels, strengthened brand operation, price management, channel execution, and supply chain operation efficiency, promoted sales growth of more than 40%, and the continuous promotion of adult milk powder made up for the overall business decline.

23FY/23H2 cheese was +230%/+171%, respectively. The C-side of cheese was affected by the subsidiary's Miracolanduo cheese stick casual snack scenario, and B-side consumer demand gradually opened up, and I am optimistic about the growth space after cultivating long-term domestic cheese eating habits.

In summary, we believe that overall revenue is in line with market expectations, liquid milk remains steady, ice cream is basically in line with market expectations, and the decline in milk powder has narrowed markedly.

The product structure is expected to be stable, and the operating profit margin will maintain an increase of 0.4 pct23FY/23H2 gross margin of +1.9/1.8 pct year-on-year, respectively. We expect the increase mainly to be due to declining raw milk costs, and the product structure is relatively stable. The increase in operating profit margins is mainly due to 1) a stable room temperature structure contributing to stable profitability; 2) an increase in the share of high-margin varieties with better growth at low temperatures; 3) significant improvements in the profitability of ice products and the narrowing of the decline in milk powder business.

The 23FY/23H2 sales expense ratio was +1.4/+2.3 pct, respectively, and the 23FY/23H2 management expense ratio remained flat at -0.1 pct year over year, respectively. The sales cost rate increased significantly, especially in the second half of the year. We believe that the main reason is that raw milk prices continued to decline beyond expectations in the second half of the year, and increased promotions were adopted to maintain product freshness while digesting supply. We determine that milk prices have maintained a low to medium single-digit downward trend in '24, so the sales expense ratio is expected to remain flat or increase slightly.

There was no impairment of the subsidiary's goodwill in 23 years, and the company has long been optimistic about the future growth space of the second curve for cheese and milk powder. We do not expect impairment in the short term; Dabao Fen had a loss of 320 million in 23 years due to falling costs, but the expected cost decline in 24 years has narrowed, and this part of the impairment affects our expected decrease in 24 years.

23FY/23H2 net interest rates were -0.9 pct/+0.3 pct, respectively, mainly due to 1) the impact of the impairment of Dabaofen; 2) the impact of domestic subsidiaries withholding tax on overseas dividends of 300 million yuan, and the increase in operating profit margins was in line with market expectations.

Executive changes will not affect long-term strategy, performance growth and dividend expectations will stabilize. The company announced that Mr. Lu Minfang was appointed as Vice Chairman of the Board of Directors, stepped down as President of the Company and continued to serve as the Company's Executive Director; Mr. Gao Fei (currently the Group's senior vice president and head of the Changwen Division) was appointed as the company's president and executive director. We believe that the management change will not affect the company's medium- to long-term strategic stability, and will still maintain the long-term trend of upgrading the liquid milk structure, as well as the long-term promotion of the second growth curve for ice cream overseas, cheese and milk powder.

The total proposed dividend is 1.92 billion yuan, with a dividend rate of 40%, an increase of 10 pct over the previous year. Mainly because the peak period of the company's fixed assets has passed and the production capacity layout has gradually improved (-2.7% compared to projects under construction in '23), the company's cash flow is expected to continue to improve in the future, and there is room for increase in the dividend rate.

Investment advice

According to the adjusted profit forecast according to the results announcement, revenue for 24-25 was lowered from $1031/108.1 billion yuan to $1020/106.3 billion, adding $110.5 billion in revenue for 26 years; net profit to mother was lowered from $57/63 billion to $54/60 billion, adding 6.7 billion yuan in net profit to mother in '26; EPS of 1.44/1.59 yuan was lowered to 1.38/1.54 yuan, and EPS of '26 was increased by 1.70 yuan. The closing price of HK$16.8 (exchange rate 0.9065) on March 29, 2024 was equivalent to 11/10/9 times PE, respectively, maintaining a “buy” rating.

Risk warning

Risk of continuing decline in the neonatal population; food safety risks; risk of changes in raw milk prices; risks caused by fierce competition within the industry, etc.