Incident: The company released its 2023 report, achieving annual revenue of 3.63 billion yuan, up 15.9% year on year, and achieving net profit of 280 million yuan, up 31% year on year; of these, 2023Q4 achieved operating income of 1.65 billion yuan in a single quarter, up 3.1% year on year, and realized net profit of 280 million yuan, down 4.2% year on year. At the same time, the company released its 2024 quarterly report, achieving operating income of 720 million yuan, a year-on-year increase of 6.8%, and net profit to mother of 0.3 billion yuan, an increase of 331% over the previous year. In addition, the company plans to distribute a cash dividend of 3.50 yuan (tax included) for every 10 shares to all shareholders.

The basic brewing market grew steadily, and the rationalized ready-to-drink team led to high growth. 1. By category, brewing and ready-to-drink achieved revenue of 2.69 billion yuan (+9.4%) and 900 million yuan (+41.2%) respectively, while 2024Q1 achieved revenue of 490 million yuan (+5.5%) and 230 million yuan (+10.1%) respectively. In terms of brewing, two health-care products were launched: “Like Fresh” Handmade Oat Milk Tea and the “Fresh Coffee Principle” Handmade Oat Latte; there was positive feedback on the trial sales of new products such as Pan-Brew CC lemon juice. After the ready-to-drink sales team operated independently, channel service capabilities improved markedly, and the ready-to-drink business achieved a relatively rapid growth rate. 2. By channel, distribution, e-commerce, and direct management achieved revenue of 3.26 billion yuan (+15.6%), 250 million yuan (+7%), and 60 million yuan (+119.3%) respectively. 2024Q1 achieved revenue of 610 million yuan (+6.6%), 70 million yuan (-9.5%), and 30 million yuan (+117.7%) respectively. The company has formed a nationwide sales network. By the end of 2024Q1, there were 1,611 dealers, a net increase of 80 over the beginning of the year.

Increased profitability. 1. The gross margins for the full year of 2023 and 2024Q1 were 37.5% (+3.7pp) and 33.6% (+2.6pp), respectively. Raw material costs declined, economies of scale gradually became apparent, and gross margin improved. 2. In terms of cost ratio, the sales expense ratio in 2023 was 23.7%, up 5.8pp year on year, mainly due to increased marketing expenses, advertising investment, etc.; management expense ratio 6.3%, down 1.1 pp year on year; R&D expense ratio 0.9%, which is basically the same; financial cost ratio -1.8%, down 0.6 pp year on year. The 2024Q1 sales expense ratio was 24%, down 2.8pp; the management expense ratio was 7.6%, down 0.3pp; the R&D expense ratio was 1%, which was basically the same; and the financial expense ratio was -2.7%, down 0.5pp year on year. 3. Net interest rates for 2024Q1 in 2023 were 7.7% (+0.9pp) and 3.5% (+2.6pp), respectively, increasing profitability.

The equity incentive target was successfully completed, and the increase in executive holdings showed confidence. 1. In February 2024, the four directors and senior management of the company plan to increase their holdings of the company through centralized bidding within 6 months, with a total amount of 20 to 30 million yuan. The plan to increase their holdings fully demonstrates the confidence of the executives in the future development of the company. 2. The company successfully completed the 2023 assessment goals of the equity incentive plan, fully stimulating the enthusiasm of core employees and laying the foundation for the company's long-term development. 3. Mr. Yang Dongyun, who has rich experience in FMCG, is the company's general manager (president) and looks forward to positive changes in the company.

Profit forecasting and investment advice. The company's net profit for 2024-2026 is estimated to be 350 million yuan, 430 million yuan, and 5.1 billion yuan, respectively, and EPS is 0.84 yuan, 1.04 yuan, and 1.25 yuan respectively. The corresponding dynamic PE is 22 times, 17 times, and 15 times, respectively, maintaining a “buy” rating.

Risk warning. New product promotion or failure to meet expectations; risk of large fluctuations in raw material prices; food safety risk.