Incident: Petty & Co., Ltd. released its 2023 Annual Report+2024Q1 Quarterly Report. 1. In 2023, revenue was 1,411 billion yuan, yoy -18.5%; net profit loss to mother was 1.09 million yuan, which changed from profit to loss (loss forecasts have been issued before). Among them, 2023Q4's revenue was 495 million yuan, an increase of 31.18% over the previous year; net profit to mother was 0.18 million yuan, which turned a loss into a profit (-31 million yuan for the same period in 2022). 2. 24Q1 achieved operating income of 384 million yuan, yoy +142.37%; net profit to mother of 41.71 million yuan, reversing losses over the previous year.

1. Domestic: The independent brand's “explosion” strategy is working, and I am optimistic about the rapid growth of the company's domestic business!

The company's domestic sales revenue in 2023 reached 350 million yuan, an increase of 27% over the previous year. In the domestic market, the company has benefited from the smooth expansion of its own brand business, especially core brands such as Juehan and Haoshijia, which has rapidly driven the growth of business revenue in the domestic market through a popular single product model.

① Brand: Big single products are strong, and the performance of the Jade Banquet is outstanding. In the domestic market, the company mainly carries out omni-channel layout, direct sales and distribution collaborations through simultaneous online and offline development, focusing on its own brands and differentiated products, forming a business content with comprehensive coverage and clear priorities. In 2023, the company's sales expenses increased 18% year-on-year, with a net increase of 10.52 million yuan (yoy +24%) in advertising expenses, and domestic marketing campaigns were very effective. In '23, Double Eleven's sales reached 25 million +, a year-on-year increase of 67% and a 65% increase over 618 in '23. Dried duck meat is in the top 1 of the Tmall dog snack list, the Petty store is in the top 2 most popular Tmall dog snack stores, Douyin's top 1 pet snacks, and the top 2 in the Jingdong dog snack list. We believe that the company's domestic sales performance in the fourth quarter was excellent, and we recommend that we pay close attention to the resumption of growth of our own brands.

② Channel: Online and offline omni-channel layout. The company has set up online brand flagship stores or franchise stores on mainstream e-commerce platforms such as Tmall, JD, and Douyin, and has signed in-depth cooperation agreements with professional e-commerce businesses such as E-pet Mall. At the same time, the company readjusted its offline channel strategy, basically changing from dealers to service providers to reduce the impact on online prices. Online channels are mainly operated by the company itself. Offline sales channels are also important channels for the company's future layout, including cooperation with well-known supermarkets such as Sam and Market Opener.

In addition, pet store companies further cover every city in the form of service providers and cooperate with some representative pet stores to increase brand exposure.

2. The production capacity layout is extensive, and overseas inventory removal is coming to an end

In 2023, the company's overseas revenue reached $1,062 million, a year-on-year decline of about 27%. The company has production bases in China, Vietnam, Cambodia, New Zealand and other countries, and can provide a rich variety of high-quality pet food to domestic and foreign markets to meet the diverse needs of domestic and foreign customers. The company was affected by inventory removal in overseas markets, especially the US market, and experienced a process from active inventory removal to active inventory replenishment, and the export business showed a trend of continuous improvement from month to month. In the second half of 2023, the capacity utilization rate and efficiency of the Cambodian factory were further improved, and the profit situation continued to improve. In March 2024, the company's factory in Taumarunui, New Zealand officially put into operation a high-quality staple food production line with an annual output of 40,000 tons. It will soon be put into large-scale production and commercial operation, which is expected to drive a significant increase in the company's overseas revenue. We believe that the current impact of inventory removal is over, the company's production capacity is widely distributed, and overseas revenue is expected to resume growth.

3. Investment advice

We originally expected the company to achieve net profit of 137/189 million yuan in 2024/2025. Considering the resumption of overseas orders, the commissioning of new production capacity, and an increase in the company's performance forecast, we expected the company to achieve operating income of 19.76/24.34/2,843 billion yuan in 2024-2026, achieving net profit of 1.48/1.91/246 million yuan, turning the year-on-year loss into profit/ 29%/29%. Maintain a “buy” rating.

Risk warning: risk of raw material price fluctuations; risk of exchange rate fluctuations; channel expansion falls short of expectations