Key points of investment:
Incident: The company released its 2023 annual report. In 2023, it achieved revenue of 5.139 billion yuan, a year-on-year decrease of 3.8%, achieved net profit of 1,697 billion yuan, turned a year-on-year loss into a profit, and realized net profit of 524 million yuan without return to mother, a year-on-year decrease of 5.8%. It is estimated that 23Q4 achieved revenue of 1,186 billion yuan, a year-on-year decrease of 14.4%, achieved net profit of 2.97 billion yuan, turned a year-on-year loss into a profit, and realized net profit deducted from non-mother of 61 million yuan, a year-on-year decrease of 60%, in line with the previously issued pre-profit announcement. The dividend plan is to pay 4 yuan (tax included) for every 10 shares, with a total distribution of about 307 million, accounting for 18.1% of net profit returned to mother in '23 and 58.5% of net profit not deducted to mother in '23.
In addition, the company announced 1) the 2024 restricted stock incentive plan, with a price of 14.19 yuan/share to be awarded to 329 people, and 2) the subsidiary Delicious Fresh Company's strategic planning plan for the next three years, which sets the strategic goal of reinventing a new kitchen state and achieving high-quality development.
Investment rating and valuation: Considering the amortization expenses of the equity incentive plan, the gradual recovery of the effects of the reform, and weak recovery in demand, the profit forecast for 2024-25 was lowered, and 2026 was added. Assuming that the 24-26 incentive amortization expenses were $0.4, 0.6 million, and $45 million, respectively, the net profit to mother is predicted to be $71 million, $9.1 billion, and $1.17 billion respectively (the previous 24-25 was $84 million and 1.04 billion), respectively. The current stock price corresponds to 2024 PE in -26 was 29x, 23x, and 18x, respectively, maintaining an increase in holdings rating. The new management team has rich experience in consumer products. They have conducted in-depth research on the company and set up an active three-year plan, which is expected to empower the development of the condiment business. As market-based assessments and equity incentives advance, the company's team confidence and enthusiasm are expected to be boosted, and internal operating efficiency is expected to improve. The company is expected to return to the acceleration channel again, stabilize its position in the condiment industry, and open up room for long-term growth.
The land lawsuit was settled, and the estimated liabilities were recovered. According to the 2023 annual report, there is a big difference between the company's net profit and net profit not deducted from the mother in '23, mainly due to the settlement reached between the parties in the land lawsuit, and the anticipated debt previously calculated was reversed. In terms of delicious food, we achieved revenue of 4.932 billion yuan in 2023, a year-on-year decrease of 0.45%; net profit of 599 million yuan, an increase of 3.04% year on year; net profit to mother is estimated to be about 550 million yuan, an increase of about 2.4% year on year.
Yummy Fresh's revenue has remained stable for 23 years. According to the 2023 annual report, Delicious Fresh's revenue declined slightly year on year. It is expected to be mainly affected by changes in the majority shareholder of the parent company Zhonghu Hi-Tech in '23, board restructuring and management team changes, and weak recovery in demand. By category, soy sauce/chicken powder, cooking oil/others achieved revenue of 30.3/6.8/4.5/72 billion in 23 years, or +0.1%/+13.4%/-10.6%/-6.8%, respectively. Looking at the subregions, revenue for East/South/Midwest/North in 2023 changed -1.5%/-0.3%/+7.4%/-10.3%, respectively. In 2023, the number of dealers increased net by 81 to 2,084. The development rate of prefecture-level cities was 94.36%, +0.89pct year on year, and the market development rate of districts and counties was 72.24%, +4.12pct year on year. Looking ahead to 2024, as the first year of the three-year doubling plan, the company will consolidate the foundation for development and achieve team run-in. At the same time, the company will focus on market expansion and dealer recruitment in Northeast China, East China and western China, laying a good foundation for subsequent revenue acceleration.
The gross margin of Delicious Fresh has improved in 23 years, boosting profitability by focusing on efficiency in the medium to long term. According to the 2023 annual report, Delicious Fresh achieved gross margin of about 32.66% in '23, compared to +1.9pct, mainly due to a decrease in the average procurement price of raw materials and optimization of the product structure. In terms of cost rates, the sales and management/R&D/finance cost rates for 23 were 9.0%/5.9%/3.6%/-0.1%, respectively, compared to -0.2/+0.9/+0.1/-0.05pct, respectively. Among them, 1) the sales expenses decreased, mainly due to the issuance of job stabilization subsidies in 22, no project expenses in 23 years, and a year-on-year decrease in sales staff remuneration expenses; 2) the increase in management expenses, mainly due to the increase in labor compensation and consulting expenses. The net interest rate for Yummy Fresh Returns in '23 was estimated at 11.4%, +0.3 pct compared to the previous year. Looking ahead to 2024, the peak cost pressure has passed, and the company will optimize the pitfalls and operating efficiency issues left over from the past. Profit margin performance is expected to rise steadily. In the medium to long term, the company also included the operating profit margin level in the three-year plan and equity incentive assessment, and the company's profitability is expected to rise above the industry average.
It is proposed to implement stock incentives to stimulate team enthusiasm and demonstrate determination to reform. The company announced the 2024 restricted stock incentive plan. It plans to grant no more than 14.388 million restricted shares, accounting for 1.83% of the company's total share capital. The grant price is 14.19 yuan/share, and it is intended to award 329 incentive recipients. The incentive plan uses the three fiscal years 2024-2026 as company-level performance assessments, and sets three assessment indicators for operating income, operating profit margin, and return on net assets using 2023 as a benchmark. This stock incentive is the first in the company's history. It is expected to not only stimulate the enthusiasm of the internal team, but also demonstrate the company's determination for this reform and confidence in future development.
Three-year strategic goal: Reinvent a new kitchen state and achieve high quality development. The company announced a strategic plan for the next three years for the subsidiary Delicious Fresh Company to set and rebuild a new kitchen state to achieve the strategic goal of developing high quality. The company plans that by 2026, Delicious Fresh will target revenue of 10 billion yuan and operating profit target of 1.5 billion yuan. In the next three years, the company will focus on improving the three capabilities of “fine marketing, continuous innovation, and lean operation”. Based on basic condiments, endogenous+epitaxial two-wheel drive will drive rapid performance growth. Under the leadership of the new board of directors and management team, the company's business ideas have been market-based, and transformation initiatives in various areas of operation, production, marketing, sales, and assessment have been steadily advanced. Delicious Fresh's operating results are worth looking forward to in the next three years.
Catalysts for stock price performance: condiment revenue growth exceeds expectations, mechanisms and incentives improve core assumptions Risks: operating uncertainty and food safety incidents due to internal personnel adjustments