Incident: The company released its 2024 quarterly report. During the reporting period, the company achieved revenue of 1.40 billion yuan, a decrease of 5.2%; net profit to mother was 120 million yuan, a decrease of 17.0%. Basically in line with market expectations.

Comment: Demand recovery in Q1 is still weak. Consumption power in the Northeast China market is under pressure, and revenue is clearly being dragged down.

Revenue growth turned negative in the first quarter, and the growth rate was weaker than in 2023Q4. Mainly due to fluctuations in demand due to the impact of the Spring Festival in February, the trend of improvement is expected in March. By region, the revenue of 2024Q1 companies in Northeast China, North China, East China, Southwest China, Southwest China, South China, and Central China was 520 million/330 million/450 million/180 million/100 million/110 million/50 million, respectively, -13.9%/-4.6%/-3.7%/+3.4%/-2.8%/-10.1%/-1.7%, respectively. The Northeast market is under the most obvious pressure. It is expected mainly due to the net outflow of population from the region combined with a weak recovery in consumption power. Shanghai in the East China region is under pressure, but Zhejiang and others have performed well. The follow-up outlook for the whole year is still relatively positive, and the southwest region is showing positive growth under adjustments. As of 2024Q1, the company had a total of 982 dealers, a net increase of 20 over the year/month over month, a net decrease of 3. Looking ahead, the company's factories in Shenyang, Qingdao, and Quanzhou were put into operation last year. Today and next two years, the company will still have factories in Henan, Changchun, Guangxi, Foshan, and Shanghai (including integrated R&D centers). After all of the new plants are put into operation, the company's nationwide production capacity layout will be further optimized, which is conducive to the company's next focus on the market and flexible scheduling. The company will go through an intensive phase of capital expenditure after 2025, and the pressure of new factories to climb and depreciation is expected to ease in the future.

Increased costs and depreciation put pressure on gross margins and a phased decline in profitability. 2024Q1's gross margin was 23.1%, a year-on-year decrease of 0.84pct, mainly due to the high cost of some raw materials, such as flour, and an increase in short-term depreciation expenses due to the commissioning of the company's new plant. 2024Q1's sales/management/R&D/finance expense rates were 8.2%/2.5%/0.6%/0.6%, respectively. The sales expenses rate declined steadily and declined slightly during the rest of the period, mainly due to negative revenue growth, and the cost ratio showed a passive upward trend. Overall, 2024Q1's net profit margin was 8.2%, a year-on-year decrease of 1.2pct.

Profit forecast: Considering the impact of the macro environment, the recovery in the Northeast China market, where the company is based, is weak. We slightly lowered our profit forecast for 2024-2025 and added 2026. The company's net profit for 2024-2026 is expected to be 630, 7.11, and 794 million yuan, respectively, with year-on-year increases of 9.76%, 12.82% and 11.65%. The latest closing price corresponding to 2024-2026 PE is 15x, 14x, and 12x, respectively, maintaining the purchase rating.

Risk warning: Consumption recovery falls short of expectations, food safety issues, intensifying competitive landscape