Incident: In 2023, the company achieved revenue of 19.53 billion yuan, -8.3% year-on-year; net profit to mother was 3.39 billion yuan, or -31.4% year-on-year. 23H2 achieved revenue of 9.80 billion yuan, -15.8% YoY, and net profit to mother of 1.69 billion yuan, or -36.9% YoY.
The gross margin has basically stabilized, and the cost ratio is still high. 23. Full year/H2 company gross profit margin of 64.8%/64.3%, -0.6pct/+0.6pct year-on-year. Among them, the gross margin of infant formula, other dairy products, and nutritional supplements in '23 was 69.4%/8.3%/57.5%, respectively, compared with +0.6pct/-4.1pct/+15.6pct for the same period in '22. Since 22H2, the company's gross margin has dropped to around 64%. Currently, gross margin is showing signs of stabilizing. The company's sales and distribution expense ratio/administrative expense ratio for the full year of 2023 was 34.3%/9.0%, respectively, +3.6pct/+1.8pct compared to the same period. The net interest rate for the year 23 was 17.4%, -5.8pct year-on-year. The gross sales gap continues to be under pressure, net interest rates continue to fall, and the negative operating leverage effect is obvious, mainly because demand was still low in 23, supply contraction was weaker than expected, and market competition was more intense than expected. Major manufacturers in the industry experienced unstable prices and many promotions.
The electronic fence system continues to advance, and prices and inventory are strictly controlled. The company introduced the “electronic fence” system on February 26, '24, which uses a fully electronic method for order delivery and final code scanning. After receiving payment at a unified retail price, manufacturers distribute profits through fully automated channels and terminals, no longer rely on provincial and regional operations, enhance manufacturers' ability to control the price market, and reduce the phenomenon of random price comparisons. This is an optimization and sublimation of the “digital ecosystem store construction” previously implemented in 23H1 (the number of digital ecosystem terminals reached 40,000 during the peak period, which has now been optimized and reduced to 23,000). Currently, the main product promoted by electronic fencing is the large single product Starfiance Zhuorui (the share of revenue has risen from 8% in '22 to 21% in '23). Under strict price control, its retail price has rebounded by 30-40 yuan. The company will promote monitoring of more products in the future. At the same time, the company promoted a “distribution system” in September 23 and stopped shipping to high-inventory channels. The offline/online market share in January 2024 was 22.8%/14.4%, respectively, -0.3%/+1.3% month-on-month compared with the June 2023 level. The online performance was impressive. The decline in offline share was mainly due to active inventory control.
The dividend payout ratio has increased dramatically, and the value target is deep. The company's dividend ratio increased dramatically in '23, up to 70%, compared to 45% + in the same period last year. We expect the absolute value of the company's dividends to increase year by year. If we consider the company's net profit of 3.59 billion yuan in 24 years (up 5.9% year on year), the dividend ratio will continue to be 70%, and the dividend amount will be about 2.5 billion yuan (up 150 million over the previous year). Based on the current market value of 34.2 billion yuan, the corresponding dividend rate will reach about 7.3%. The company is rich in cash of about 10.5 billion dollars, and capital expenditure is expected to be reduced. If the logic of industry share concentration is implemented (industry CR5 was 56% in 23 and 43% in 2019) and the company's price control is successful, business performance is stable or even increased, and future dividend amounts are guaranteed.
Investment advice and profit forecasting. We expect the company's revenue for 2024-2026 to be 204.4/211.6/21.88 billion yuan (previous value: 227.4/245.5/NA billion yuan), +4.7%/+3.4% YoY; net profit to mother of 35.9/37.6/3.95 billion yuan (previous value: 53.7/59.3/NA billion yuan), +5.1% YoY. EPS is expected to be 0.40/0.41/0.44 yuan in 2024-2026 (previous value was 0.59/0.65/NA), and the corresponding PE is 9.4X/9.0X/8.6X. Based on the company's dividend level, we believe that with a dividend rate of 4.5% or above, the company is highly attractive for investment. Therefore, the company was given 15 x PE for 24 years (previous value 10 x PE), and the target price was HK$6.4 (unchanged, 1 HKD = 0.92 CNY), maintaining a “superior to market” rating.
Risk warning: The new population continues to be sluggish, competition is fierce, and the promotion of new products falls short of expectations.