Incident: In 2023, the company's revenue was 98.62 billion yuan, +6.5% (endogenous +2.6%); operating profit was 6.17 billion yuan, +13.8% year over year; net profit to mother was 4.81 billion yuan, -9.3% year over year.
2023H2 revenue was 47.51 billion yuan, +5.9% (endogenous +2.3%); operating profit was 2.9 billion yuan, -0.3% year over year; net profit to mother was 1.79 billion yuan, +15.3% year over year.
Liquid milk has an excellent structure and performs better than the industry. In 2023, liquid milk/milk powder/ice cream/cheese/ other revenue was +4.9%/-1.6%/+6.6%/+229.8% (endogenous -70%)/-32.1%, respectively; 2023H2 liquid milk/milk powder/ice cream revenue was +4.7%/-3.1%/-1.8% year-on-year, respectively.
We estimate that Trensu's revenue grew faster than basic white milk in '23, and the upgrading of the structure of white milk products continued. The ice cream business slowed in the second half of 2023 (+10%/-2% year-on-year growth in the first and second half of 2023, respectively), but the overseas ice cream business expanded well and achieved double-digit growth.
OPM has improved and stable cash flow, and the main business is operating well. The company's gross margin sales expense ratio in 2013 was 37.2%/25.5%/4.8%, +1.9pct/+1.4pct/+0.0pct year-on-year. The company's rising gross margin benefited from falling raw milk prices. At the same time, the product structure performed well, but the cost ratio increased. Based on the above, the company's 2023 OPM increased by 40 basis points to 6.3% year on year, and 23H1/23H2 OPM increased 110 basis points/decreased by 40 basis points respectively, and the guidelines continued to be implemented throughout the year. We expect 2024 to continue the trend of expanding gross margins, rising expense ratios, and rising OPM.
Non-recurring and non-operating accounts cause net profit to fluctuate, and the impact will weaken in 2024. The net profit margin to mother was 4.9%, a decrease of 85 basis points from the previous year, which was much lower than expected. Mainly due to non-recurring profit and loss drag, including (1) Dabaofen's value of 320 million yuan, +36% year over year. This account is expected to decrease month-on-month in 24. (2) Revenue from the sale of subsidiaries decreased by nearly 300 million, and net income from fair value of negotiable bonds decreased by nearly 100 million dollars year over year. (3) The 2022 base is slightly higher. In 2022, there was 860 million fair value earnings on financial debt related to changes in the share price of Mirco Corundum (but there was also 740 million goodwill impairment). At the same time, non-main operating categories also had a negative impact on net profit attributable to the mother, including (1) the decline in the contribution of joint ventures: Modern Animal Husbandry's profits are under pressure, and Mengniu should account for -78% of the profits of associated companies to 92 million yuan compared to the same period last year. (2) Dividend withholding taxes, etc., increased the effective tax rate by 2.3 pct to 22.6% year-on-year.
Capital expenditure has declined, and dividend rates have increased. The dividend payout ratio increased from 30% to 40% in 2023.
The company's capital expenditure in 2023 was 4.17 billion yuan, -17.8% YoY. As capital expenditure decreases, we believe there is still room for future dividend payout ratio expansion. The company focuses on shareholder returns. In '23, the company's share repurchases totaled HK$795.6 million (26.9 million shares were repurchased and cancelled, accounting for 0.7% of the total number of tradable shares).
Profit forecast and investment advice: We expect the company's 2024-2026 revenue to be 1014.9/1055.3/109.60 billion yuan (previous forecast was 1105.7/1209.7/NA billion yuan), up 2.9%/4.0%/3.9% year on year; net profit to mother is 54.2/62.2/6.75 billion yuan (previous forecast was 68.8/80.4/NA billion yuan), up 12.7%/14.7%/8.6% year on year; EPS is 1.38/1.58/ 1.72 yuan (previous forecast was 1.75/2.04/NA). Referring to comparable company valuations, we gave the company 20xPE in 2024 (previous value 25xPE), and the corresponding target price was HK$29.8 (1HKD = 0.9235 CNY, previous target price 41.5 HKD). Maintain an “better than market” rating.
Risk warning: The recovery of some categories fell short of expectations, and the macroeconomic environment for consumption was sluggish.