Incident: The company released the 2023 annual report and 2024 quarterly report. In 23, it achieved revenue of 7.056 billion yuan, -5.09% year on year; net profit to mother of 749 million yuan, -6.55% year on year; deducted non-net profit of 646 million yuan, -8.95% year on year. Looking at a single quarter, 23Q4 achieved revenue of 1,641 billion yuan, -21.83% YoY; net profit to mother of 197 million yuan, -28.63% YoY; and deducted non-net profit of 162 million yuan, or -38.76% YoY. 24Q1 achieved revenue of 2,254 billion yuan, -5.01% year on year; net profit to mother 230 million yuan, -17.76% year over year; deducted non-net profit of 197 million yuan, -18.04% year on year. In '23, the company plans to distribute a cash dividend of 5.00 yuan (tax included) to all shareholders for every 10 shares. The current profit distribution is 440 million yuan, accounting for 58.66% of the net profit to mother.

Traditional noodle rice is under pressure, and the B-side continues to develop. Market by market: The revenue of the restaurant market was 1,430 billion yuan, +17.93% year on year. The B-side continued to develop. The growth rate of the big B side is expected to be higher than that of the small B side; the retail innovation market revenue is 5.626 billion yuan, -9.58% year over year, mainly due to the high base during the same period, compounded by the slow recovery in retail market consumption power this year. By product: Revenue from quick-frozen noodle rice in '23 was 5.829 billion yuan, -9.46% year on year. In addition to being affected by the Spring Festival period, revenue from traditional varieties of dumplings, rice dumplings, etc. is expected to decline year-on-year due to homogenized competition in the industry and the division of supermarkets. New and sub-new products are expected to grow rapidly; revenue from quick-frozen preparation was 1,076 million yuan, +28.44% year on year; revenue from refrigeration and short-term insurance was 100 million yuan, -8.29% year over year. Channel division: Distribution/direct sales in '23 were $55.18/1,254 billion yuan, respectively, -2.25%/-18.87%. Direct sales channels were mainly affected by supermarket operations; direct e-commerce revenue was 229 million yuan, +20.71% YoY. Sales of the main online item “raw dumplings” broke 100 million in '23, and the compatibility between products and online channels increased and continued to be sold online.

Gross profit pressure dragged down profits. In '23/24Q1, non-net interest rates were -0.39/-1.39pcts year-on-year. In '23/23Q4, the company's gross margin distribution was 25.84%/22.76%, -2.23/-4.05pcts. The main reasons for the decline in gross profit were: 1) fixed cost dilution was limited due to a slight decline in the general market, 2) increased channel investment (price discounts) under industry competition, 3) the share of dumplings and rice balls decreased; 24Q1 gross margin -1.68 pcts year over year to 26.60%.

On the cost side, the 23-year sales/management expense ratio was 11.48%/2.30%, -0.41/-0.64pcts year over year, retail sales materials and sales personnel investment continued to be accurate; 24Q1 sales/management expense ratio was 12.23%/1.87%, -0.38/-0.18pcts year over year. Non-net interest rate deducted 9.15% in '23, -0.39pcts year on year; in 24Q1, 8.76% deducted non-net interest rate, -1.39pcts year on year.

Management reforms are progressing in an orderly manner, and results are expected to be shown. On the product side, traditional noodles operate steadily, and continue to innovate products; channel-side reforms and adjustments to the organizational structure, stabilize the stock of direct channels, control fees and improve efficiency, and promote new channels such as e-commerce. Catering channels follow up existing major customers and expand pan-regional chain customers, and it is expected that steady growth will be achieved under product channel matching.

Investment advice: Revenue for 2024-2026 is expected to be 72.2/74.7/7.79 billion yuan, respectively, +2.3%/3.5%/4.2%; net profit to mother is 7.6/7.8/8.1 billion yuan, +1.2%/2.7%/4.4% YoY. The P/E corresponding to the current stock price is 14/14/13 times, respectively, maintaining the “recommended” rating.

Risk warning: Product promotion falls short of expectations, channel expansion falls short of expectations, raw material prices have risen sharply, and industry competition has intensified