Incident: On April 16, the company released its 2023 annual report, achieving revenue of 2,714 billion yuan for the full year of '23, an increase of 12.62%; net profit to mother of 142 million yuan, a decrease of 27.71%. Looking at a single quarter, in the fourth quarter of '23, the company achieved revenue of 631 million yuan, an increase of 13.04%; realized net profit to mother - 473,400 yuan, a decrease of 101.11%.

The decline in milk prices affected the performance of the animal husbandry industry, and expansion outside the country progressed steadily. The company achieved sales of 284,500 tons of dairy products in '23, an increase of 6.21% over the same period last year. By product, the company's 23Q4 room temperature products achieved revenue of 360 million yuan, accounting for 57.48% of products, an increase of 13.01%; low-temperature products achieved revenue of 255 million yuan, accounting for 40.21% of products, an increase of 18.61%. 23 The company's room temperature and low temperature products accounted for 56.67% and 40.01% respectively throughout the year, with growth rates of 18.65% and 7.57% respectively. In the short term, upstream milk prices in the industry continued to decline, and the company's animal husbandry products achieved revenue of 112 million yuan in 23Q4, a decrease of 41.61%, which dragged down the overall growth rate. By channel, the domestic market achieved revenue of 319 million yuan in 23Q4, an increase of 1.65%; the overseas market continued to gain strength, achieving revenue of 307 million yuan, an increase of 28.57%, and the growth rate was impressive. 23 The domestic and foreign markets accounted for 53.73% and 46.27% respectively in the whole year, with growth rates of 6.03% and 20.84% respectively. The contribution of the overseas market continued to increase.

The specialty stores continue to expand, and the milk supply rate continues to rise. In terms of dealers, the number of domestic/overseas markets increased by 6 or 46 month-on-month in 23Q4, with a total of 930 dealers at the end of the period. The company's main overseas sales channel is specialty stores, and a unified digital management model is implemented to create a stable member sales system. By the end of '23, the company had 1,000 specialty stores. In terms of production capacity, the company owns a total of 26 ranches from nine dairy farming enterprises, including Tianao Animal Husbandry, Shawan Tianrun, and Xinnong Dairy Animal Husbandry Branch. The total number of cows kept is about 65,000. At the end of '23, the company's own milk production rate reached 92.36%. In '23, the first phase of Tianrun's Shandong Qiyuan dairy processing project with an annual output of 150,000 tons was completed and put into trial operation; Tianrun Technology promoted the construction of 200,000 tons of production capacity to ensure long-term growth demand.

Expenses increased during the expansion period, and the merger of new farmers and disposal of cattle affected the company's performance. The company achieved a gross profit margin of 17.58% in 23Q4, a decrease of 0.07pcts. The 23Q4 sales expense ratio was 5.21%, up 1.89pcts; the management expense ratio was 5.99%, up 0.69pcts, and expenses increased during the expansion period; the company's 23Q4 net margin was -0.88%, down 8.52pcts. The company's acquisition of Xinnong Dairy was merged, causing asset impairment losses. The impact of Xinnong Dairy on the company's profit in 2023 was -95.35 million yuan; if the impact of Xinnong was excluded, the company's total annual profit should be 268 million yuan, an increase of 24.65%. In addition, the company eliminated some biological assets and increased the profit and loss from the disposal of illiquid assets by 75.5855 million yuan, which dragged down short-term profit performance.

Investment advice: The company is a leading dairy company in China and is still in the expansion stage outside the country. The animal husbandry sector is expected to resume growth along with the recovery in milk prices. At the same time, the integration of the new agricultural dairy industry is accelerated, and growth dividends are expected to be released. The company's business plan: Achieve sales volume of 320,000 tons of dairy products in 2024, an increase of 12.48%; estimated revenue of 3 billion yuan, an increase of 10.54%. We expect the company's revenue for 24-26 to be 30.22/33.98/38.26 billion yuan, respectively, and net profit to mother of 1.86/2.26/262 million yuan, respectively. The P/E corresponding to the current stock price is 16/13/11X, respectively, maintaining the “recommended” rating.

Risk warning: risk of upstream milk supply; increased competition for expansion outside the country; food safety issues, etc.