Incidents:

The company released its 2023 annual report, achieving revenue of 2,714 billion yuan, +12.62% year-on-year, and realized net profit of 142 million yuan, or -27.74% year-on-year. Among them, 23Q4 revenue was +13.04% YoY, and net profit to mother was -101.11% YoY. The company plans to pay a cash dividend of 42.89 million yuan, with a dividend rate of 30.20%.

Q4 Revenue continued to grow by double digits, and the resilience of overseas market expansion was highlighted:

In 2023, the company achieved revenue of 2,714 billion yuan, of which 23Q4 achieved 631 million yuan, +13.04% over the same period. In the context of the Spring Festival stalled schedule and strong competition in the industry, continuing the previous double-digit growth trend is an excellent performance, including the Xinnong brand. By market, domestic revenue was +6.03% year-on-year in 2023, and the core market continued a steady growth trend. In Q4, domestic revenue was +1.65% YoY. Among them, the lack of student milk business and weak domestic market demand dragged down revenue performance to a certain extent. Overseas revenue in 2023 was +20.85%, of which Q4 revenue was +28.57% year-on-year. It still achieved rapid growth in the context of the Spring Festival and market competition, confirming that the company still remains resilient in expanding overseas markets. Furthermore, we expect it to be related to the low base in 22Q4 due to restrictions on logistics transportation outside of China. By category, room temperature revenue in 2023 is +18.65% YoY, Q4 +13.01% YoY. Demand for pure milk and the like is expected to continue. The low temperature category's 2023 revenue is +7.57% YoY, and Q4 is +18.61% YoY, which is expected to be related to the promotion of new Ecline yoghurt and increased demand for categories such as pasteurized milk.

Split volume and price, the company sold 284,500 tons in 2023, increasing volume by 6.21% and price by 5.83%, confirming that the product structure continues to rise.

Cow disposal and Xinnong dragged down annual profit performance. It is expected that the company's net profit in 2023 will benefit from rising milk prices of $142 million. On the one hand, the decline in profit came from the disposal of biological assets of 75.5855 million yuan. On the other hand, the acquisition of Xinnong Dairy affected the company's profit of 95.35 million yuan, including its own losses of 56.9 million yuan, premium amortization of 27.37 million yuan, and interest expenses of 1.08 million yuan. The company's gross profit margin in 2023 is 19.25%, +1.34pct year on year. However, after the acquisition of Xinnong, the company's ranch side allocation increased further. The self-sufficiency rate for raw milk increased to 92.36% in 2023, and the gross profit margin of the company's animal husbandry industry during the downward phase of milk prices was -3.40%, offsetting part of the cost dividend, but the subsequent upward phase of milk prices is expected to contribute to profit growth. The cost rate for the full year was 10.56%, +1.82pct year on year. Among them, the financial expense ratio was +0.88pct to 0.67% year over year, mainly due to the increase in interest expenses for the acquisition of Xinnong.

Differentiated regional style of play is driving scale growth, with short-term pressure on profits. Future flexibility can be expected to look forward to 2024. Demand in the dairy market is weak, supply-side volume is relatively sufficient, and market competition is expected to remain relatively high. Currently, Tianrun continues to differentiate its regional style of play, focus on core markets such as Guangdong and Zhejiang, and promote continuous revenue expansion through product structure optimization, etc., with 1,000 specialty stores at the end of 2023, a net increase of 236 throughout the year. In terms of production capacity, according to the announcement, the company's Shandong plant has been put into trial operation and continues to build 200,000 tons of production capacity in northern Xinjiang Tianrun Technology to ensure long-term growth space. In terms of profit, the company's current 92% raw milk self-sufficiency rate is at an absolute high level. The short-term downturn in milk prices is relatively damaged, but the future will fully benefit from the upward phase of milk prices, and long-term profit flexibility is expected to be unleashed.

Investment advice:

We expect the company's 2024-2026 revenue growth rates to be 11.9%, 10.4%, and 9.5%, respectively, and net profit growth rates of 16.2%, 50.8%, and 23.3%, respectively. Considering the current downturn in milk prices, the company's short-term profits are greatly affected by milk prices and cow losses, and Xinnong will drag down the company's profits to a certain extent, but considering the future phase of rising milk prices, the company is expected to fully benefit from the cost dividends brought about by the plateau milk self-sufficiency rate, and profit elasticity is expected to be fully released. With an investment rating of Buy-A, the 6-month target price is 11.34 yuan, corresponding to 22x PE in 2024.

Risk warning: Raw milk prices have declined for a long time, cow prices have declined further, overseas channel expansion falls short of expectations, domestic demand falls short of expectations, and product promotion falls short of expectations.