Incident: The company released its 2023 annual report. In 2023, the company achieved operating income of 5.139 billion yuan, a year-on-year decrease of 3.78%; net profit to mother was 1,697 million yuan, an increase of 386.53%; net profit after deducting non-return to mother was 524 million yuan, a year-on-year decrease of 5.79%. According to estimates, 2023Q4 achieved operating income of 1,186 billion yuan, a year-on-year decrease of 14.37%; net profit to mother was 2,969 billion yuan, an increase of 394% year-on-year, and net profit after deducting non-attributable net profit of 61 million yuan, a year-on-year decrease of 60%.

Soy sauce and chicken extract are growing steadily, and market development and channel sinking continue to advance. In 2023, the company's condiments/park and real estate development and operation/pulleys and automobile and motorcycle accessories achieved revenue of 4.866 billion yuan/155 million yuan/44 billion yuan respectively, with year-on-year changes of -0.45%/-33.88%/-48.01%, respectively. In terms of the core condiment business, by product, the company achieved revenue of 3,028 billion yuan/676 million yuan/446 million yuan/716 million yuan/716 million yuan respectively in 2023, with year-on-year changes of 0.09%/13.44%/-10.62%/-6.79%, respectively. Among them, the soy sauce and chicken extract chicken powder business maintained steady growth; in terms of volume and price, the sales volume of soy sauce/chicken extract chicken powder/ edible oil in 2023 was +1.86%/+15.74%/-9.58%, respectively. -1.73%/-1.99%/-1.15%. Looking at the subregion, the East/South/Midwest/North achieved revenue of 1,119 billion yuan/2,230 million yuan/1,080 million yuan/636 million yuan, with year-on-year changes of -1.24%/-5.46%/7.35%/-10.29%, respectively. Revenue growth in the Midwest was mainly due to continued expansion in empty regions. In terms of the number of dealers, the number of company dealers reached 2,084 at the end of 2023, with a net increase of 81 dealers. At the end of 2023, the development rate of the company's districts and counties reached 72.24%, an increase of 4.12 pcts over the previous year, and the development rate of prefecture-level cities reached 94.36%, an increase of 0.89 pct over the previous year.

The cost of raw materials has declined, and the gross margin of condiments has increased markedly. In 2023, the company's overall gross margin was 32.71%, up 1.01pct year on year. Among them, the gross margin of the condiment business was 32.19%, up 1.97pct year on year, mainly due to the decline in the purchase price of raw materials and the impact of product structure optimization. In 2023, the direct material costs of the company's soy sauce/chicken powder and cooking oil changed by -4.87%/8.34%/-7.88%, respectively.

The company's overall sales expense ratio in 2023 was 8.9%, up 0.05 pct year on year, but the main reason for the decrease in absolute cost was the provision of job stabilization subsidies in '22, and no project expenses in '23, which affected the year-on-year reduction in sales staff remuneration; the management expenses ratio was 7.34%, +1.28pct, which was mainly affected by increased expenditure on compensation for termination of labor relationships and consulting fees; 23Q4 sales/management expenses ratio was +0.7 pct/+5.8 pct year over year.

In terms of other cost ratios, the company's R&D/finance expenses ratio in 2023 was +0.18/-0.04pct, respectively. The changes in R&D expenses were mainly affected by the increase in investment in delicious R&D projects; under the overall influence, the company's deducted non-net interest rate in '23 was 10.20%, a slight decrease of 0.21pct year on year.

The company clarifies strategic plans, implements equity incentives, and takes more measures to welcome a new stage of development. The company released Delicious Fresh's strategic plan for the next three years. The goal is to create a new kitchen state and achieve high quality development. 2024 is the beginning of a three-year strategic period and a year of momentum. The company emphasizes continuing to focus on the condiment industry, strictly guided by strategy, and firmly implementing various business initiatives: marketing, improving channel model efficiency, improving product portfolios, and creating large national products; in terms of production, promoting lean supply chain management, improving resource utilization and capacity efficiency, and reducing production and operation costs; in terms of product development, establishing an efficient and collaborative R&D mechanism to grasp market demand and improve R&D efficiency. In addition, the company announced the 2024 Restricted Stock Incentive Plan (draft), which plans to grant 14.388 million restricted shares to 329 people, accounting for 1.83% of the total share capital, with a grant price of 14.19 yuan/share. The performance assessment requirements are based on 2023. The revenue growth rate for 2024-2026 will not be less than 12%/32%/95%, respectively, the operating profit margin will not be less than 15%/16.5%/18%, respectively, and the return on net assets will not be less than 14%/15.5%/20%, respectively. In the context of the gradual release of the company's internal reform dividends, the clarification of the company's strategic plan and implementation of equity incentives will drive business development. It is expected that the company will usher in a new stage of development and strive to achieve the revenue target of 10 billion dollars.

Investment advice: With the clarification of the three-year strategic plan of Delicious Fresh and the implementation of equity incentives, the company's basic orientation is good. Empty market development and channel decline are expected to contribute significant revenue growth. With channel advantages, the product portfolio continues to improve, and profitability is also expected to increase steadily. The company's net profit for 2024-2026 is estimated to be 776, 9.39, and 1,196 million yuan, respectively, and EPS is 0.99, 1.20, and 1.52 yuan, respectively. The corresponding 24-26 valuation is 28, 23, and 18 times, respectively, maintaining a “buy” rating.

Risk warning: Increased industry competition, demand recovery falling short of expectations, pressure on raw material costs, channel expansion falling short of expectations, management improvements falling short of expectations, food safety issues.