The company released its 2024 quarterly report. The 24Q1 revenue/profit ratio was -5.2%/-16.9%, due to weak demand in the short-term insurance industry and the decline in passenger traffic through traditional channels. In '24, the company focused on stability, maintained a number of new production capacity, and looked forward to a recovery in demand in the main business after improving consumer demand and developing new channels in '24. Prices of raw materials on the cost side were basically stable year over year. Affected by increased depreciation and rising financial expenses, net interest rates increased or there was slight pressure. Focus on the improvement in profit margins as capacity utilization was restored. We expect the 24-25 EPS forecast to be 0.33 and 0.32, corresponding to the 24-year PE 18X, downgraded to an “overweight” rating.

Incident: The company released its 2024 quarterly report. 24Q1 revenue/profit/net profit after deducting non-attributable profit was 1.40 billion/ 120 million/110 million, respectively, -5.2%/-16.9%/-16.5% year-on-year. Cash repayments of 1.60 billion yuan were achieved in 24Q1, down 3.6% year on year. The decline was slightly lower than revenue. Net operating cash flow was 190 million, up 23.6% year on year, mainly due to lower tax payments.

Q1 Sales declined month-on-month, and the main bread business revenue was -4.7% YoY. By category, 24Q1's bread and confectionery revenue was 1.39 billion yuan, down 4.7% year on year. Affected by factors such as weak demand in the short insurance industry and declining passenger traffic through traditional channels, sales pressure increased in Q1. Q1 Other categories (corn, braised eggs, etc.) achieved revenue of 8.13 million, a year-on-year decline of 48.7%, mainly due to weak demand combined with a high base last year.

The main markets in Northeast China/East China/North China are under pressure, and the Southwest is benefiting from better capacity expansion. Looking at the main markets in Q1 by region, North China/Northeast China/East China were -4.6%/-13.9%/-3.7%, respectively, and Central China/Northwest/South China -1.7%/-2.8%/-10.1% YoY. The Southwest region benefited from new production capacity and good channel development performance, with a year-on-year increase of 3.4%. The company continued to increase its market development efforts in East China. East China had a net increase of 8 dealers over the same period last year, and dealers in some regions were optimized. By the end of 24Q1, the number of dealers was 982, a net increase of 20 over the previous year, and a decrease of 3 over the previous year.

Low capacity utilization and declining return on investment affected profits. Q1 net interest rate was -1.2% year-on-year. The 24Q1 company achieved a gross profit margin of 23.1%, a year-on-year decrease of 0.8 pct, mainly due to low capacity utilization and high return rates, and stable flour and oil prices on the cost side. The 24Q1 sales/management expense ratio was -0.1 pct/+0.2 pct year on year, and investment income decreased by 6.42 million year on year. In the end, Q1 achieved net interest rate of 8.2% to mother, -1.2 pcts year on year, net interest rate without return of 7.8%, and -1.1 pcts year on year, and profits were under pressure in the short term.

Mainly stable in '24, I expect the growth rate of the main business to resume. In 24 years, the company maintained new production capacity in many locations in Guangxi, Changchun, Henan, Shanghai and Foshan, further enriched the channel layout, improved the construction of weak market outlets, and looked forward to a gradual improvement on the demand side and an improvement in capacity utilization. On the cost side, the prices of flour and fat are basically stable, and the cost of raw materials is expected to maintain a stable trend in 24 years.

Investment advice: Demand from the main business in Q1 is under pressure, and we look forward to future improvements in demand. The 24Q1 revenue/profit ratio was -5.2%/-16.9%. Revenue and profits were pressured by weak demand in the short-term insurance industry and declining passenger flow through traditional channels. The company focused on stability in '24, maintained new production capacity, and looked forward to a recovery in demand in the main business after the domestic consumption environment improved in '24. Prices of raw materials on the cost side were basically stable year over year. Affected by the increase in new depreciation, manufacturing costs are expected to rise slightly, and net interest rates will rise or be under slight pressure. Focus on the improvement in profit margins as capacity utilization recovers.

We expect the 24-25 EPS forecast to be 0.33, 0.32, corresponding to the 24-year PE 18X, downgraded to an “overweight” rating.

Risk warning: macroeconomic impact, intensification of industry competition, impact of channel changes, sharp rise in costs, demand recovery falling short of expectations, etc.