occurrences

On April 18, 2024, Junyao Health released its 2023 annual report.

Key points of investment

Revenue is growing steadily, and profit-side recovery can be expected

The company's total revenue in 2023 was 1,634 billion yuan (+66%), mainly due to exclusive patented technology/new products and good business development trends, and net profit of 58 million yuan (-25%), mainly due to a year-on-year decline in sales of lactic acid drinks in 2023Q4 due to the 2024 Spring Festival mistake. 2023Q4's total revenue was 278 million yuan (+97%), and net profit attributable to mother was 25 million yuan (same period in 2022 - 202 million yuan). The company's gross margin for 2023/2023Q4 was 24.43%/22.91%, a decrease of 11 pcts/27 pcts, respectively. It was mainly due to rising raw material prices/consumption fluctuations impacting the odor-driven business. Costs of large bags of powder, PET, etc. fell in 2024, which is beneficial to improvements on the gross profit side. The sales/management expense ratios in 2023 were 11.49%/7.76%, respectively, with a reduction of 7 pcts/0.5 pct, respectively. Expense ratio optimization led to the company's 2023 net interest rate of 3.96% (-3 pcts), which was lower than the gross profit margin.

Runying's order potential is sufficient. The supply chain business is contributing new growth points. Looking at products, lactic acid bacteria drinks are under pressure in the short term. In 2023, revenue from lactic acid bacteria drinks was 580 million yuan (-11%). Faced with adverse effects such as weak consumer market/increased competitions/increased costs, revenue was slightly under pressure. The company will continue to expand the flavor power segment in 2023, adding and optimizing a total of 12/19 SKUs. Subsequent flavor dynamics will be repaired starting with strong regions, and then expanding the scale through channel expansion. The probiotic food sector is concerned about the execution of Runying's orders. Probiotic food revenue in 2023 was 155 million yuan (+206%), mainly due to the merger of Runying. Runying achieved revenue of over 100 million in 2023, breaking through three consecutive years of loss before the restructuring, and turning a loss into a profit. Runying's production capacity is expected to be fully implemented in 2024. Currently, orders are sufficient. Under production capacity guarantee, if subsequent orders are successfully implemented, the annual revenue target of 400 million yuan will be quite sufficient. The supply chain is progressing at a pace. The revenue of the commodity supply chain in 2023 was 809 million yuan (+463%). Thanks to significant improvements in standardization and business collaboration in the Panyuan supply chain, there was a net increase of 1,100 customers in 2023. Currently, the supply chain is still progressing at a pace. In addition, the company's revenue for probiotic drinks/other beverages in 2023 was 0.32 billion yuan, respectively, +5%/-23% compared with the same period last year.

The distribution channel foundation is consolidated, and Runying drives overseas business expansion

By sales model, distribution/direct sales revenue in 2023 was 1,450/181 million yuan, up 67%/137% respectively. Distribution channels expanded steadily, and the sharp increase in direct sales channel revenue was mainly due to consolidated profit. Looking at the subregions, e-commerce, Northeast China, North China/ East China/ South China/ Central China/ Northwest/ Southwest China/ Northwest/ Southwest China were 0.30/0.39/0.20/11.65/0.51/1.66/0.24/0.67 billion yuan, respectively, compared with -29%/+69%/+44%/+109%/-10%/+65%/+7%, respectively. The rapid growth in East China was mainly due to the addition of new core regional supply chain businesses. The rapid revenue growth in Northeast China/North China/Northwest China was mainly due to consolidated profits. Jun Yao Runying's overseas business expansion has achieved remarkable results, driving the company to achieve revenue of 68 million yuan in overseas markets in 2023, which strongly supports the implementation of the company's internationalization strategy.

Profit forecasting

We are optimistic about the company's leading position in the room temperature lactic acid bacteria industry. By adding the company's exclusive core functional strains, we will empower the product and enhance the core competitiveness of the product. Furthermore, after the company's integration, Runying, a leading domestic probiotic company, has sufficient potential. Combined with reduced raw material costs, profitability is expected to continue to recover. According to the annual report, EPS for 2024-2026 is expected to be 0.29/0.40/0.54 yuan respectively, and the current stock price is 28/20/15 times PE, respectively, maintaining a “buy” investment rating.

Risk warning

Downward macroeconomic risks, increased risk of market competition, rising costs, growth in the probiotic market falling short of expectations, falling short of expectations in the integration of Runying, and obstruction of overseas market development.