incident. The company released its 2023 annual report: In 2023, the company achieved total operating income of 2.45 billion yuan, -3.9% year on year, net profit of 827 million yuan, -8.0% year on year. Among them, the Q4 single quarter achieved total operating income of 498 million yuan, -0.8% year on year, and net profit to mother of 167 million yuan, or -17.3% year on year. At the same time, the company announced the 2023 profit distribution plan: cash dividend of 3.00 yuan (tax included) for every 10 shares, with a dividend rate of 41.9%.

New products are growing rapidly, and direct sales channels are performing well. By product: Mustard revenue was -4.6% YoY (volume -3.8%, price -0.8%). We think it may be related to the slow recovery of the consumer market under a high base; kimchi/radish revenue was -6.5%/-26.0% YoY. In 23 years, the company continued to promote new products on the product side, boosting new products of mustard sauce (achieving an annual transfer value of nearly 40 million yuan). Other products (including mustard sauce) grew rapidly, and revenue was +75.7% over the same period last year. By region: Revenue in Southwest China/South China/Central China achieved positive growth of +5.4%/+1.0% year-on-year, respectively, and -8.2%/-1.5%/-6.7%/-20.7%/-30.0% year-on-year in East China/ North China/ Central Plain/ Northwest/ Northeast China, respectively. Channel division: In '23, the company promoted the expansion of catering channels and strengthened channel layout (net increase of 112 to 3,239 dealers), and the distribution amount of condiments for catering products increased by more than 30% over the same period last year, exceeding 80 million yuan. Direct sales/distribution channel revenue in '23 was +27.7%/-5.5%, respectively. In the future, the company will further concentrate on sinking channels, cultivate and expand weak markets; vigorously explore catering channels, and consolidate online channels.

The 24-year reduction in costs is expected to boost gross profit margins. The company's gross margin was -2.43 pct to 50.7% year on year, mainly due to the increase in raw material prices (vegetable head purchase price +40%). Among them, the gross margin of mustard, kimchi, and radish was -2.17pct/-5.55pct/-6.86pct, respectively, to 54.8%/26.1%/25.0% year on year. The purchase price of vegetable heads fell back to 800 yuan/ton in '24. We believe that as low-priced raw materials are gradually put into use, the effect of the company's cost reduction is expected to gradually be reflected.

Expenses were well controlled during the period, and profitability was under pressure in the short term. The cost rate for the 23-year period was -0.68 pct to 13.1% year over year, with the sales expense ratio -0.97 pct to 13.4% year over year, mainly due to the marketing expenses ratio -1.28 pct year on year; management/R&D expense ratios were +0.20 pct/+0.08 pct year on year to 3.6%/0.2%, respectively. Due to the decline in gross margin, net profit margin was -1.53 pct to 33.7% year over year in '23. The net profit margin for 23Q4 was 6.70pct to 33.6% year over year, mainly due to the low base sales expense ratio +9.05pct to 13.2% year over year.

Profit forecasting and investment advice. We expect the company's 2024-2026 EPS to be 0.80, 0.89, and 0.98 yuan/share, respectively. Referring to comparable company valuations, we gave the company 20-25xPE in 2024, with a corresponding reasonable value range of 16.07-20.08 yuan, maintaining a “superior to the market” rating.

Risk warning. Competition in the industry is intensifying, channels are sinking, sales of new products fall short of expectations, and food safety issues.