1Q24 results are in line with our expectations

The company announced 1Q24 results: 1Q24, the company's revenue +1.7%; net profit to mother +58.9/ 81.7% year-on-year, respectively; gross margin/sales expenses rate/management expense ratio/net profit margin to mother and net profit margin without return to mother +0.4/-0.6/-0.2/+1.0/+1.3ppt, respectively. The 1Q24 results were in line with our expectations.

Development trends

U8 continues to release potential energy to support structural upgrades. Volume: Based on the high base for the same period last year (1Q23 sales increased by 12.8%), we expect the company to achieve a slight increase in 1Q24 sales. Price: We expect U8 products to continue the high growth trend in 2023. Sales will maintain a year-on-year growth rate of more than 30%, driving the overall tonnage price to rise slightly by about 1%, and continue the trend of structural upgrading. In addition, the company's 1Q24 contract liabilities increased by 90 million yuan to 147 million yuan year-on-year, and the total 1Q24 revenue+contract liabilities also increased by 3.1%.

Costs have declined, operating efficiency has improved, and profitability has increased markedly. 1Q24's gross margin was +0.4ppt to 37.2% year-on-year. We expect it is mainly due to the high growth of U8 products driving structural upgrades and the downward impact of raw material costs. The sales/management/R&D expense ratio was -0.6/-0.2/-0.1ppt to 11.9/11.8/ 1.9% year-on-year, and the operating efficiency improved significantly. Combining the above factors, the company's net profit margin for 1Q24 increased 1.0ppt to 2.9% year-on-year.

2024 outlook: The budget target is to achieve 7% revenue growth, U8 continues to have a rich product portfolio and a sharp rise in volume and price, optimize reform efficiency and continue to improve profitability. U8 is positioned at a price of 8-10 yuan to enjoy upgrade dividends. Relying on the rapid expansion of the base market, we believe that the development potential will continue to penetrate the country, thereby achieving the goal of 90-1 million tons by 2025. Furthermore, the company followed the trend to build products such as V10, U8plus, and fresh beer 2022, forming a healthy high-end layout. In terms of management, the company strengthens its headquarters functions, optimizes the supply chain, digitalization, etc., and is expected to achieve a steady increase in profitability as labor efficiency increases and cost rates are reduced. Furthermore, with the price of raw materials such as barley falling, we expect the company's profitability to improve significantly in 2024.

Profit forecasting and valuation

We basically maintained the company's 2024/25 net profit of 960/1,265 million yuan. The current stock price was traded at 28.2/21.4 times P/E in 2024/25. Considering the impact of sector valuation fluctuations, we lowered our target share price by 18.0% to 12.3 yuan/share, corresponding to 28.6/21.7 times P/E in 2024/25. There is 27.9% upward room compared to the current stock price, and maintain the outperforming industry rating.

risks

Market competition, fluctuations in raw material prices, changes in preferential tax policies, food safety and other risks.