Incident: The company released the 2023 Annual Report & 2024 Quarterly Report. Among them, it achieved revenue of 3.625 billion yuan for the full year of 2023, net profit of RMB 280 million, +31.04% year-on-year, after deducting non-net profit of RMB 231 million, +32.76% year-on-year; of these, 2023Q4 achieved revenue of 1,647 million yuan, +3.06% YoY, net profit of RMB 277 million, and -4.2% YoY. 2024Q1 achieved revenue of 725 million yuan, +6.76% year over year, net profit to mother of 0.25 million yuan, +331.26% year over year, after deducting non-net profit +382.6% year over year.

Revenue for 2023 was in line with expectations, and 2024Q1 revenue performance was solid. By product throughout the year, the company achieved revenue of 2,686/901 million yuan respectively, or +9.37%/+41.16%, respectively. Brewing achieved steady growth driven by the acceleration of new products and increased terminal potential. In 2023, the company upgraded plant milk products around the industry's health trend, and launched new products “like fresh” and “fresh coffee”, with good trial sales feedback. At the same time, ready-to-drink growth was impressive in 2023, mainly due to the smooth progress of new product sales and excellent sales performance. The company registered a net increase of 199 dealers to 1,531, of which it is expected that there will be more than 200 new full-time ready-to-drink dealers. The new Lan Fangyuan Frozen Lemon Tea achieved pre-tax revenue of 200 million yuan in the first year of its launch, and the growth momentum is strong. 2024Q1's revenue increased 6.76%, and brew/ready-to-drink increased 5.5%/10.1% year over year. Q1 company's promotion activities increased a lot, and sales discounts reduced revenue. The actual overall shipping growth rate is expected to be higher than the revenue growth in the statement. At the same time, considering brewing inventory optimization issues in March, the pace of delivery slowed slightly. Q1 revenue +Δ advance receipt was 711 million yuan, +13.8% year over year, and sales revenue +16.7% year over year.

Gross margin increased significantly in 2023, and 2024Q1 profits grew with high elasticity. In 2023, the company's gross margin was +3.73 pct year on year to 37.53%. Among them, the gross margin for brewing was +4.03 pct to 44.68% year over year, and ready-to-drink +6.73 pct to 18.41% year over year. The increase in gross margin was related to the increase in scale effects, as well as the decline in the prices of raw materials such as milk powder and fat graft powder. The annual sales/management/financial expenses ratio of the company was 23.7%/6.3%/-1.8%, compared to +5.8/-1.1/-0.6pct, respectively. The sales expenses rate increased significantly, mainly due to the company increasing its advertising efforts in line with the promotion of new products. The annual marketing/advertising expenses were +87%/+89%, respectively. At the same time, in 2023, the company became a separate drinking division, which led to an increase in employee remuneration. The company ensures a stable profit level by controlling back-office expenses. Management expenses and financial expenses are effectively reduced, and the annual net interest rate is +0.9 pct to 7.73% year-on-year. 2024Q1's gross margin was +2.6 pct to 33.6% year on year. It is expected to be related to the gradual increase in capacity utilization rate driven by sales. At the same time, sales expenses/management expenses were -2.8/-0.3 pct year on year, and the net margin was +2.6 pct to 3.5% year on year. There is a clear trend of ready-to-drink loss reduction.

The second ready-to-drink curve is developing well, driving highly elastic profit growth. Looking ahead to 2024, the company's brewing business is expected to grow steadily by double digits through product innovation and intensive cultivation of high-potential outlets. The net interest rate of the brewing business remains above 16% all year round. It is a relatively stable cash flow business and can provide solid support for the development of new products. This year is the first year since the company successfully adjusted its ready-to-drink internal management structure. It is expected that it will continue to focus on the two core products, Meco juice tea and Lanfangyuan frozen lemon tea, to prepare for subsequent nationwide expansion through network expansion and increased marketing. It is expected that ready-to-drink revenue will continue to grow with high elasticity throughout the year. Furthermore, the sales scale of the ready-to-drink business gradually increased this year, driving an upward recovery in the utilization rate of production capacity. Profits in the ready-to-drink business are expected to steadily reduce losses, and I am optimistic that the profit level will recover with high elasticity.

Profit forecast: We expect revenue of 42.06/48.01/5.429 billion yuan in 2024-2026, up 16%/14%/13% year on year, and realized profit of 3.54/4.50/538 million yuan, up 26%/27%/19% year on year, corresponding to PE 20/15/13X. We gave 25 times PE based on our 2024 results, with a target price of 21.53 yuan per year, maintaining a “buy” rating.

Risk warning: Food safety risks; increased industry competition; risk of rising raw material costs; sales falling short of expectations during the peak ready-to-drink season; changes in internal management adjustments; and network development falling short of expectations.