The company released its 2023 annual report. The company's annual revenue was 9.29 billion million/ +1592.0%, net loss to mother of 83 million yuan, and net loss of non-return to mother of 84 million yuan. The mass snack industry is currently still in a period of rapid growth, and the industry share is concentrated at an accelerated pace; the company team is of high quality, leading in multiple dimensions such as supply chain, warehousing, expansion, and brand, and the leading advantage is stable. It is expected that the share will continue to increase, and profits will gradually be realized. Maintain a “Highly Recommended” rating.

The mass snack business has exploded, and profitability continues to improve. The company achieved revenue of 9.29 billion yuan/ +1592.0% in 2023, net loss of 83 million yuan to mother, and net loss of 84 million yuan after deducting non-return to mother. By business, in 2023, the company's snack sales revenue was 8.76 billion/+13057.8%, and the edible fungus business revenue was 530 million/ +10.8%.

The company's annual revenue achieved explosive growth under the rapid expansion of mass sales of snacks; in terms of profit, due to losses in the edible fungus business, the company's mass snack business invested a lot in a period of rapid development, and factors such as the increase in equity incentives tied to high-quality talents in the mass-selling snack business caused the company to lose money in 2023. However, the profitability of the company's mass-selling snack business improved markedly from quarter to quarter. Excluding equity incentives, the net profit for mass-selling snacks in 23Q1-Q4 was -11 million, -31 million, 0.05 billion, and 0.7 billion respectively. The corresponding net interest rates were -2.03%, -2.23%, 0.18%, and 1.82%, respectively. It is expected that the profitability will continue to increase in the future.

23 There was a net increase of 4,4494 stores for the whole year, and it is expected that the rapid expansion of stores will continue in 2024. The company added 4,633 new stores in 2023, closed 76 stores, reduced the number of stores by 63, and increased the net number of stores by 4494. The number of stores at the end of the reporting period was 4,726. The company had 3245/699/408/73/190/66/45 stores in East China/Central China/North China/Northwest/Southwest China/Northeast China, respectively, with a net increase of 3021/693/408/73/189/65/45 respectively.

The company has leading advantages in East China and Central China, and continues to explore the national market to enhance brand influence and market share. Currently, there are still many empty markets in the industry, and the company is expected to maintain a rapid pace of store expansion in 2024.

The gross margin for mass-selling snacks has increased markedly, and the sales expense ratio continues to be optimized. The company's gross margin for the full year of 2023 was 9.3% /-6.7pct. The decline in gross margin was mainly due to an increase in the share of the mass snack business. Among them, the gross margin of the mass snack business in 23H1/H2 was 7.87%/9.99%, respectively, and the gross margin increased markedly in the second half of the year.

The company's expense ratio for the full year of 2023 was 9.8% /-0.5pct, of which the financial expense ratio was 0.3% /-0.2pct, the management cost rate was 4.8% /-1.4pct, and the R&D cost rate was 0.04% /-0.3pct; the company's sales expense ratio was 4.7% /+1.1pct, of which the 23H1/H2 sales expense ratio for mass-sold snacks was 5.76%/4.67%, respectively. The sales expense ratio was clearly optimized as the scale of the business grew and the refinement of the company's operations were refined.

Investment advice. The mass snack industry is currently still in a period of rapid growth. The market share is concentrated at an accelerated pace. The company team is of high quality, leading in multiple dimensions such as supply chain, warehousing, expansion, and brand. The leading advantage is stable. It is expected that the share will continue to increase, and profits will gradually be realized. The company's 2024E/25E/26E net profit is estimated to be 2.0/43/ 61 billion yuan respectively, maintaining the “Highly Recommended” rating.

Risk warning: Store expansion falls short of expectations, store opening space falls short of expectations, competition intensifies, food safety risks