Core views

The overall market demand in the frozen industry maintained a moderate recovery trend in 2023, but since 23Q4, against the backdrop of relatively weak demand during the peak season, industry competition has intensified. In particular, relatively traditional dumpling products faced double pressure from falling volume and price, causing the company's revenue to decline year-on-year in both 23Q4 and 24Q1. Facing changes in the market environment, the company focused on its own business adjustments. The retail side strengthened the diversified channel layout and product innovation, and the restaurant side optimized the organizational structure to seize opportunities for food demand recovery. The company's catering business (accounting for 20.3%) sales increased 17.9% year-on-year in '23. In terms of profit, gross margin declined due to factors such as increased competition in the industry and a decline in the share of sales of high-margin products, but investment efficiency showed an optimization trend under the company's channel restructuring.

occurrences

The company announced its 2023 Annual Report & 2024 First Quarter Report:

In 2023, the company achieved revenue of 7.056 billion yuan, a year-on-year decrease of 5.09%; net profit to mother of 749 million yuan, a year-on-year decrease of 6.55%; net profit after deducting non-return to mother was 646 million yuan, a year-on-year decrease of 8.95%.

In the 23Q4 single quarter, the company achieved revenue of 1,641 billion yuan, a year-on-year decrease of 21.83%; net profit to mother was 197 million yuan, a year-on-year decrease of 28.63%; net profit after deducting non-return to mother was 162 million yuan, a year-on-year decrease of 38.76%.

In the 24Q1 quarter, the company achieved revenue of 2,254 billion yuan, a year-on-year decrease of 5.01%; net profit to mother was 230 million yuan, a year-on-year decrease of 17.76%; net profit after deducting non-return to mother was 197 million yuan, a year-on-year decrease of 18.04%.

Brief review

Weak demand combined with increased competition caused short-term revenue performance to maintain a moderate recovery trend in the quick-frozen industry in 2023. However, since 23Q4, against the backdrop of relatively weak demand during the peak season, industry competition has intensified. In particular, relatively traditional dumpling products faced the double pressure of falling volume and price, causing the company's revenue to decline year-on-year in both 23Q4 and 24Q1. Facing changes in the market environment, the company focuses on its own business adjustments. The retail side strengthens the diversified channel layout and product innovation, and the restaurant side optimizes the organizational structure to seize opportunities for food and beverage demand recovery. By channel, sales in the company's catering business (accounting for 20.27%) increased 17.93% year on year in 2023, mainly due to the company strengthening its customized service capabilities for major restaurant chain customers and increasing its layout for small B scenarios such as social meals, group meals, and banquets; while sales of retail and innovative businesses (accounting for 79.73%) fell 9.58% year on year, and the company's direct supermarket business continued to be optimized and streamlined, while increasing investment in emerging C-end retail channels such as community e-commerce, fresh e-commerce, and discount stores. Among them, direct-run e-commerce business (accounting for 3.24%) sales compared to 23 An increase of 20.71%. By product, sales of the company's quick-frozen rice products (accounting for 82.62%) fell 9.46% year on year. Among them, sales of traditional rice balls, dumplings, and zongzi products (accounting for 52.28%) fell 15.74% year on year, while sales of innovative rice products (accounting for 30.33%) increased by 3.91% year on year. In addition, the company's quick-frozen prepared food (accounting for 15.25%) performed well, with sales up 28.44% year on year, while sales of refrigerated and short storage products (accounting for 1.35%) fell 8.29% year on year.

Gross margin declined year-on-year, and investment efficiency continued to improve

The company's gross margin for 23Q4 was 22.76%, down 4.05 pcts year on year. The sharp decline in gross margin is expected to be mainly affected by factors such as increased competition in the industry and the decline in sales share of high-margin products (such as gyoza, etc.). In terms of expenses, the company's 23Q4 sales/management/R&D/finance rate changed year-on-year to +3.04/-2.07/-0.30/-0.18pcts. Among them, the increase in sales rates is expected to be mainly due to the company's increased investment in market resources, while the 22Q4 base is low; the decline in management rates is mainly due to the impact of equity incentive cost rebounds, etc. In addition, other income such as some VAT refunds and government grants increased year-on-year, ultimately causing the company's 23Q4 net interest rate to fall 1.10pcts year-on-year to 12.01%. Looking at the whole year, the company's gross margin decreased by 2.23 pcts year on year, and the sales/management/R&D/finance rate changed to -0.41/-0.64/-0.16/-0.02pcts year on year. The decrease in sales rates was mainly due to more accurate investment in promotional materials and sales personnel on the retail side, and the annual net profit margin fell 0.15 pcts to 10.62% year on year. As far as 24Q1 is concerned, the company's gross margin decreased by 1.68 pcts year on year, the sales/management/R&D/finance rate changed to -0.38/ -0.18/+0.06/+0.06 pcts year on year, and net profit margin fell 1.58 pcts year on year to 10.19%, and short-term profitability weakened.

Product categories continue to expand, and channel structures tend to be diversified

Facing changes in the demand environment, the company has accelerated business adjustments in product R&D and channel changes in recent years, optimized its stock business, and continued to explore new growth points. On the product side, according to changes in consumer preferences, the company launches differentiated, healthy and convenient products to enhance the sense of product value. In addition, the company is also using the beef and lamb series as one of its future development priorities, continuously broadening product boundaries. In terms of channels, the company is actively exploring the B-side market, seizing supply chain development opportunities in the context of increasing chain chain rates, strengthening personal service for chain restaurant customers, focusing on customized product development, and launching unique cost-effective products for scenarios such as group meals, country kitchens, and banquets. However, for retail channels, in the face of the rise of emerging channel business formats, the company is focusing on optimizing the original direct supermarket cooperation model, strengthening the layout in new business formats such as e-commerce, new retail, and member supermarkets, continuously optimizing the channel structure and enhancing consumer reach. In an environment where industry demand is weak, pay attention to the business progress of subsequent companies in the catering channel and the market performance of new categories.

Profit forecast:

We expect that in 2024-2026, the company will achieve revenue of 76.01, 81.15, and 8.588 billion yuan, and net profit to mother of 817, 8.74, and 927 million yuan, corresponding EPS of 0.93, 0.99, and 1.05 yuan/share.

Risk warning:

1) Risk of rising raw material prices: There are many types of raw materials involved in frozen food. If the prices of some raw materials exceed expectations, it will put great pressure on the company's profits; 2) New product performance falls short of expectations: the company needs to expand the scope of business and optimize the business structure by continuously promoting new products. If the market performance of the company's new products falls short of expectations, it will affect the company's subsequent growth; 3) Channel expansion falls short of expectations: the company's supermarket channel advantage has increased in recent years. If the channel expansion falls short of expectations, it will affect the company's product costs and investment costs. Release the plan. 4) Industry competition intensifies: The company faces high competitive pressure in new business fields such as prepared dishes and modern pasta. If competition intensifies further, it will affect the company's profitability.