In 4Q23, Zhonghu Hi-Tech's performance was under short-term pressure due to organizational adjustments. In 2023, the company achieved revenue of 5.14 billion yuan, -3.9% year-on-year. Among them, condiments/real estate/other revenue was 48.7/16/120 million yuan, respectively, -0.5%/-34%/-46% year-on-year. In the condiment business in 2023, revenue from soy sauce/chicken extract, chicken powder/cooking oil/other condiments was 30.3/6.8/4.5/72 billion yuan, 0.1%/13.4%/-10.6%/-6.8%. The corresponding revenue for 4Q23 was -17.3%/+18.1%/-18.7%/-21.1%, respectively, mainly due to 4Q23 organizational restructuring and channel inventory reduction. In terms of volume and price, the volume and price of soy sauce and chicken powder rose and fell in 2023, mainly due to the rapid growth rate of low- and mid-range products; the volume and price of other condiments fell slightly, and the volume and price of cooking oil fell sharply.

The gross margin in 2023 was 32.7%, of which the gross margin for delicious condiments was 32.66%, an increase of 1.9 points over the previous year, corresponding to an expansion of 2.5 points in 4Q23, mainly benefiting from the decline in raw material prices. In '23, the cost per ton of soy sauce and chicken extract decreased by 5.7% and 6.3%, respectively, driving gross margin to expand by 2.6 points, while the cost per ton of cooking oil and other condiments rose, leading to a year-on-year decline in gross margin. The management expenses rate in 2023 was 10.9%, up 1.5 points from the previous year, and 14.9% corresponding to 4Q23, a significant increase over the previous year, mainly due to the impact of implementing organizational changes to calculate dismissal benefits. Non-operating income increased significantly in 2023, mainly due to the recovery of anticipated liabilities of $1,178 billion relating to litigation accrued over 22 years. In 2023, the company achieved net profit of 170 million yuan after deducting non-return to mother net profit of 520 million yuan, corresponding to net profit of 61 million yuan in 4Q23. Among them, the Delicious Fresh Business contributed 86 million vs. 4Q22 165 million, which declined sharply, mainly due to the impact of reduced operating income and the impact of dismissal of benefits due to organizational changes. Benefiting from anticipated debt recovery, the company's balance ratio improved significantly to 22.6%. Net cash flow from operating activities in 2023 was $842 million, +24% year over year.

Equity incentives have been implemented, and the goal is to create a new kitchen state in three years. The company also announced the 2024-2026 equity incentive plan, which plans to grant no more than 14.388,000 restricted shares, accounting for 1.83% of the company's total share capital; the plan is to grant incentives to 329 people, including company directors, senior management, middle management and core key personnel; the grant price of restricted shares is $14.19 per share; the sales restrictions are lifted for 24/36/48 months, respectively, and the ban will be lifted for 30%/35%/35%, respectively. The unlocking conditions for each phase of the plan are based on 2023 results, which require 1) operating income side, growth rate of not less than 12% in 2024, growth rate not less than 32% in 2025, and 95% growth rate in 2026; and 2) operating margin side, no less than 15% in 2024, not less than 16.5% in 2025, not less than 18% in 2026; and 3) return on net assets, no less than 14% in 2024, no less than 15.5% in 2025, and 20% in 2026. Among them, Delicious Fresh's business target (not an equity incentive target) is a 2026 revenue target of 10 billion yuan and an operating profit target of 1.5 billion yuan, including endogenous and epitaxial growth. We expect the company to rely on endogenous growth in the early stages, increase in epitaxial contributions in the middle and late stages, and extend or contribute about 20% of revenue. Furthermore, real estate and other businesses will gradually be divested.

Investment suggestions and profit forecasting: At present, the company has basically completed organizational structure changes. Executives and middle and senior management are basically in place. In the future, it will continue to sort out internal work processes and improve internal work efficiency, adjust and optimize dealers and customers, and emphasize survival of the fittest and improvement of quality and efficiency. The 1H24 equity incentive has been implemented, and multiple catalysts can be expected in the future. The goal is to introduce war investment within 3 years, and the real estate business letter is yet to be divested. Currently, Zhongju Hi-Tech Delicious Fresh accounts for only 3% of the soy sauce and oyster sauce market, and there is plenty of room for growth; chicken extract and chicken powder have a strong competitive advantage and are in the top three; the volume of cooking wine and vinegar is expected to exceed 100 million, and it will continue to develop and support. The five southern and eastern provinces are the main sales areas of Zhongju Hi-Tech. In the future, South China, Southwest China, Central South China, and East China will increase investment in key regional markets. We expect Zhonghu Hi-Tech's revenue for 2024-2026 to be $58.4/68.1 billion yuan (original forecast of 62.1/7.06 billion yuan for 24-25), up 13.6%/16.7%/17.7% year on year; net profit withheld from non-return to mother for 2024-2026 will be 7.5/9.6/1.27 billion yuan respectively (original forecast of 88/1.08 billion yuan for 24-25), up 43%/27.4%/33.5% year on year (compared to the original 2024-25 revenue and net net of non-return to mother) The profit forecast was lowered, mainly because the company's 2023 revenue and net profit after deduction were lower than expected, corresponding to a reduction in revenue and profit expectations for 24-25). The corresponding 2024-2026 PE is 29.4X/23.1X/17.3X.

The revenue share of Zhongju Hi-Tech Condiments is small, there is broad scope for nationalization, and the implementation of three-year business goals and equity incentives have led to an increase in the company's revenue and profit margin. We maintain Zhonghu Hi-Tech's “superior to the market” rating and give it a valuation of 36X PE in 2024, with a target price of 34.3 RMB, with 22% upside (original target price 39.1 RMB, -12%, 35X PE valuation in 2024).

Risk warning. The recovery of the catering industry has been slower than expected, and competition in the industry has intensified.