1. Frozen baking industry: a blue ocean track of rapid growth; the echelon gap is obvious, standing out from the top

1) Industry space: We expect the CAGR of China's frozen baking market to be 30% from 2022 to 2025. It is still in a stage of rapid growth. The growth drivers include:

① The downstream baking market has large space and is growing steadily. According to Euromonitor International, the retail sales of China's bakery market was 8% in 2015-2022, and is expected to exceed 300 billion yuan in 2025. ② The penetration rate of frozen baking in China is low, and there is plenty of room for improvement. The penetration rate of frozen baking in China is 10%, far lower than the penetration rate of 30% in Japan and 70% in the US. Considering that the proportion of ready-made baked goods in China is higher than in other countries, it is expected that there is a lot of room for improvement in the penetration rate.

2) Competition pattern: China's frozen baking industry is still in the early stages of development, and the concentration is not high; most of them are regional enterprises. Ligao is currently the leading enterprise with the largest revenue volume in the frozen baking industry, higher than major competitors such as Enxi Village, Xinwanlai, and Xindi Jiahe. Production in the industry has expanded rapidly in recent years, but considering that the overall demand of the industry is growing rapidly, and most of them are local enterprises and brands in the region. Channel reach efficiency is different, and there may be pressure to reshuffle in the short term, but a national price war is unlikely.

2. The company's core advantages: multi-category coverage, omni-channel layout, and strong supply chain management to build a medium- to long-term moat 1) Development strategy: Ligao has complete product line planning, rich categories, and the ability to develop a second growth curve and organizational evolution. In 2019, the company proposed a platform-based operation strategy to achieve a diversified product layout. In the process of extending the industrial chain, the closed-loop model of product-channel-service was verified. As of 2023H1, the company has formed 27 brands including Ligao, Aokun, Meihuang, Daoqiang, Mitia, and New Seni. The total number of products and specifications for cream, fruit products and sauce products exceeds 1,000, which can meet the one-stop procurement and consumption needs of different types of downstream customers. End customers have also evolved from the original bakery stores to current bakery stores, beverage stores, restaurants, supermarkets and convenience stores.

2) Product side: The company adheres to the big single product strategy and builds a complete product matrix through iterative upgrading of old products and continuous promotion of new products to meet the one-stop procurement needs of customers. The company diversifies and upgrades traditional large items such as donuts, mochi, Portuguese tarts, and Swiss rolls to meet the segmented needs of different customers and grades, such as upgrading the tart crust to hardcover Portuguese tarts and epitaxial donut flavors. In addition, we are actively promoting new products. 250+ new products and new application solutions were launched in 2022, far exceeding the 50 plans in 2021; starting at the end of 2022, new products such as Elaus butterfat cream, whipping cream 360PRO, and machine-made handmade egg tart crust continued to be launched, and some individual products sold well.

3) Channel side: The core lies in the maintenance of traditional channels and the ability to maintain emerging channels. Traditional distribution channels are mostly dominated by small B customers. Product quality and service capability are key elements to strengthen customer stickiness. The company continues to cultivate the market and promote channel decline. By the end of 2022, the company had more than 2,200 dealers, nearly 1,000 sales staff, and a marketing network covering all provinces, municipalities directly under the Central Government and autonomous regions of China except Hong Kong, Macao and Taiwan. Furthermore, the company is actively expanding emerging channels such as supermarkets and restaurants. On the one hand, it is expected to reduce the risk of a single channel, and on the other hand, it is expected to rapidly drive revenue growth. 2023Q1-Q3, the company's traditional distribution channels accounted for about 50%, a single-digit increase over the previous year; supermarket channels accounted for nearly 35%, up more than 60% year on year; innovative channels such as food, tea, and new retail accounted for more than 15% of revenue, with a year-on-year growth rate of over 60%.

4) Supply chain: Efficient supply chain management, large-scale automated efficient production, and large-scale distribution networks can build a moat with cost advantages, further forming positive feedback on business operations. ① Production capacity side: The company's production capacity expansion is aggressive, seizing market share in the early stages of industry development, and is expected to gradually expand large-scale advantages and build supply chain barriers. In 2017-2022, the company's frozen baking production capacity was expanded from 21,000 tons to 107,000 tons, with a CAGR of 33%; in 2023, the company raised 950 million yuan in convertible bonds to build a new frozen baking capacity of 107,000 tons. ② Purchasing side: Larger midstream manufacturers have stronger bargaining power and are also more advantageous in diluting production costs. Furthermore, in July 2022, the company established Guangdong Liao Grease Co., Ltd., which is expected to further control costs through self-sufficiency of raw materials in the future. ③ Sales side: Based on the principle of consistent authority and responsibility, the company sorts out and adjusts the warehousing and logistics management system, and clarifies the functional boundaries and coordination mechanisms between the supply chain sector and the marketing sector in cold chain logistics, warehousing management, etc., which is expected to further reduce logistics costs. ④ Organizational structure: In the second half of 2022, the company's internal organizational structure was adjusted. From the previous frozen baking, cream, sauce and other divisions to the establishment of a group-based product center and R&D center, the organizational structure was flattened, and labor efficiency is expected to gradually improve.

3. Profit forecast and valuation: Considering the weak overall consumption environment, we will adjust the profit forecast in line with the company's 23-year performance forecast. We expect the company's revenue for 23-25 to be 35.6/43.3/5.20 billion yuan (previous value was 40.3/5.05 billion yuan in 23-24), with year-on-year growth rates of 22%/21%/20%, respectively; net profit to mother of 0.9/2.9/40 billion yuan (previous value was 31/440 million yuan in 23-24), with year-on-year growth rates of -38%/230%/36%, respectively. Quick-frozen companies such as Yasui Foods and Sanquan Foods, as well as baking ingredient companies such as Nanqiao Foods and Hairong Technology, were selected. Considering the dividend period of the frozen baking industry and the company's rapid growth, they were given 0.65 XPEG in 24 years, with a target price of 45.71 yuan/share, maintaining a “buy” rating.

Risk warning: risk of raw material price fluctuations, downstream sales falling short of expectations, dealer management risks, etc.