2023 and 1Q24 results fell short of our expectations

The company announced 2023 & 1Q24 results: 2023 revenue/net profit to mother of 700.56 billion yuan, -5.1%/-6.4% YoY; 4Q23 revenue/net profit to mother of 16.41/197 million yuan, -21.8%/-28.4% YoY; 1Q24 revenue/net profit to mother 22.54/230 million yuan, -5.0%/-17.8% YoY. Results for 2023 and 1Q24 fell short of our expectations, mainly due to weak demand and increased C-side competition. Furthermore, the company's dividend rate increased from an average of 43.6% in 2021-22 to 58.7% in 2023, increasing shareholder returns.

Development trends

Demand on the C-side is falling, and the growth of traditional pasta such as gyoza and rice balls is under pressure. Overall consumption is weak, C-side growth is under pressure, compounded by a decline in KA supermarket channel traffic and weak demand for products such as traditional gyoza and rice balls. Under a high base, 4Q23 revenue declined sharply. 1Q24 still faces downward pressure on the KA channel even though the pressure on the base has decreased. 1) By scenario, 2H23 retail/catering revenue was -18.2/ +16.0% year-on-year to 2.37/80 billion yuan. Among them, retail-side direct e-commerce revenue also increased 43.9% to 120 million yuan. Big B side developed with customers. We expect the revenue growth rate to be much higher than that of the small B side. 2) By product, revenue from 2H23 dumplings & rice dumplings & rice dumples/pasta/condiment products was -24.5%/-4.3%/+21.6% year-on-year to 14.5/1.04 billion yuan.

Competition has intensified, and price reduction promotions have led to reduced profitability. The company's 4Q23/1Q24 net profit margin was -2.7/-1.4ppt to 9.9%/8.8% year on year. Looking at the spin-off, 1) gross profit margin: weak demand and intensified competition, which led to 4Q23/1Q24 falling 4.0/1.7ppt to 22.8%/26.6%; 2) sales expense ratio, 4Q24/1Q24 to +3.0/0.4ppt to 9.8%/12.2%. The main reason for the 4Q23 increase was that 4Q22 had fewer expenses affected by the pandemic; 3) Management expense ratio, 4Q23, 4Q23 increased the main reason why 4Q23 increased 4Q23, 4Q23 was affected by the pandemic. /1Q24 also declined 2.1/0.2ppt to 0.8%/1.9%. The 4Q23 decline was clearly mainly due to the impact of equity incentive costs.

Looking ahead to 2024: B-side development is expected to support revenue growth, and competition may affect profitability or be under pressure.

B-side: The company continues to develop big B customers, including Yum Sheng. With the increase in product supply and new customer development, we believe that 2024 is expected to maintain high growth; the small B-side is expected to maintain steady growth in benefiting product penetration. C-side: Considering the continued diversion of offline KA channels and pressure on the growth of traditional rice and noodle products, we expect KA channel growth to remain under pressure, while distribution channels are expected to remain stable. Profit side:

Considering that the demand side is still weak and competition is still fierce, we expect that there will still be pressure on the price side and the cost side, and the company's overall profitability may be close to 2023 levels.

Profit forecasting and valuation

Considering weak demand and increased competition in the industry, 2024 revenue was lowered by 13.5% to 7.242 billion yuan, and 2025 revenue of 7.497 billion yuan was introduced for the first time, considering reduced profitability, 20.4% of net profit to mother in 2024 was lowered to 754 million yuan, and net profit of 2025 was introduced for the first time. The current stock price was traded at 14.6/13/5 times P/E valuation in 2024/25. Considering profit forecast adjustments, the target share price was lowered by 22.4% to 15.0 yuan/share, corresponding to the 2024/2025 17.5/16.1 P/E valuation, with 19.5% upside compared to the current stock price. Maintain outperforming industry ratings.

risks

New product promotion falls short of expectations, channel expansion falls short of expectations, competition intensifies, and food safety issues.