Incident 1: The company released its 2023 annual report: operating income, net profit attributable to mother, and net profit excluding non-return to mother were 7.84/2.54/227 million yuan, respectively, -5.39%/-10.45% YoY; net operating cash flow of 315 million yuan, -7.68% YoY; EPS (basic) 1.30 yuan. The company plans to distribute a cash dividend of 0.39 yuan (tax included) per share to all shareholders, with a dividend payment rate of 30.38%. The results are in line with market expectations.

Incident 2: The company released its 2024 quarterly report: operating income, net profit attributable to mother, and net profit excluding non-return to mother were 2.21/0.77/ 0.68 billion yuan, respectively, +7.15%/23.19%/22.30%; operating net cash flow of 49 million yuan, -37.49% year over year; EPS (basic) 0.39 yuan. The results slightly exceeded market expectations.

Comment:

Weak consumption in 2023 weighed on performance, and 1Q24 open source savings drove performance recovery. 4Q23 revenue, net profit attributable to mother, and net profit excluding non-return to mother were 2.42/115/108 million yuan, respectively, compared with -24.80%/-22.03%/-24.05%. The performance declined markedly, which was related to the economic slowdown and weak consumption recovery. In 2023, the company's gross margin was -1.69pp to 82.72% year on year, the cost ratio for the period was +1.69pp to 54.88%, and the net profit margin was -1.03pp to 32.44% year on year. The decline in gross margin was related to the commissioning of the Yanglong factory and the increase in manufacturing costs. The company's revenue in 1Q24 resumed positive growth, with gross margin -0.62pp to 82.91% year on year, period expense ratio -5.12pp to 51.03%, and net interest rate +4.55pp to 34.92% year on year. With enhanced cost control, profit growth was faster than revenue.

Online channels are resilient, and improving marketing quality is worth looking forward to. In 2023, revenue from Ganoderma lucidum spore powder products was 534 million yuan, or -7.92%, accounting for 70% of total revenue, with gross margin of -0.87pp year on year; revenue of dendrobium officinale products was 127 million yuan, -2.03% year-on-year, accounting for about 16% of total revenue, with gross margin of -0.08pp year on year. Revenue for both major product lines declined, and gross margins declined. By region, revenue within Zhejiang Province/outside Zhejiang Province/Internet revenue was -8.49%/-17.89%/+7.35%, respectively, and online channel consumption was resilient. On the basis of adhering to the traditional market, the company is increasing its online marketing efforts, further increasing the exposure of the Shouxianggu brand through Xiaohongshu, Douyin, Baidu channel communication, WeChat video accounts, DingTalk News, etc., while broadening sales channels. In the future, the company will increase community promotion efforts, increase the investment efforts of urban distributors of spore powder tablets across the country, strive to expand the market outside the province, and achieve the company's multi-regional development.

Profit forecasting, valuation and rating: The company is a leader in the Ganoderma lucidum spore powder industry. It has rich cultural heritage, exclusive seed sources and the world's only barrier removal technology, and has established competitive barriers with low cost and high quality. The company continues to lead the clinical value development of Ganoderma lucidum spore powder, and the nationwide expansion is worth looking forward to. Considering that the recovery in domestic consumption fell short of expectations, the 24-25 net profit forecast was lowered to 296/355 million yuan (down 30%/32%, respectively), and the net profit forecast for the additional 26 years was 417 million yuan. The corresponding PE price for the current stock price was 18/15/13 times, downgraded to an “increase in holdings” rating.

Risk warning: risk of natural disasters; risk of loss of seeds and technology; expansion outside the province falls short of expectations.