Incident: Petty Co., Ltd. released its 2023 annual report and 2024 quarterly report. It achieved operating income of 1,411 million yuan for the full year of 2023, -18.51%; a net profit loss of 0.11 million yuan to mother, a profit of 127 million yuan for the same period in '22; a net profit loss of 0.7 million yuan after deducting non-return to mother, or a profit of 135 million yuan for the same period in '22. 23Q4 achieved operating income of 495 million yuan, +31.18% year-on-year; net profit to mother of 0.18 million yuan, loss of 31 million yuan in the same period in '22; net profit after deducting non-return to mother of 0.24 million yuan, or loss of 28 million yuan for the same period in '22. 24Q1 achieved operating income of 384 million yuan, +142.37% year-on-year; net profit of 42 million yuan, loss of 38 million yuan for the same period in '22; net profit after deducting non-return to mother of 40 million yuan, or loss of 39 million yuan for the same period in '22.

Overseas markets are gradually recovering, and domestic independent brands are growing steadily. By region, foreign and domestic revenue in 2023 was 1,062/350 million yuan, or -27.10%/+26.95% compared with the same period last year. The short-term pressure on foreign market performance is mainly due to a decline in inventory digestion and order volume from overseas customers. According to the latest order feedback, the inventory volume of major customers has basically recovered, and the overseas ODM business is expected to recover to 2022 levels. Domestic private brand business revenue is growing well. The 24Q1 Jueyan brand revenue achieved a high growth rate, and the brand market share is expected to increase further as the product repurchase rate remains at a high level. By product, in 2023, animal skin chewing/vegetable chewing/nutritious meat quality/staple food and wet food achieved revenue of 4.24/4.23/3.18/210 million yuan, respectively, or -22.11%/-34.84%/-5.72%/+31.33% over the same period last year. The New Zealand staple food business is expected to enter the commercial large-scale production stage in '24, which is expected to drive a relatively rapid growth in staple food revenue and contribute additional volume on the revenue side.

The pace of investment has been adjusted to lower rates, and profitability has recovered. In terms of gross margin, for the full year of 2023/23Q4/24Q1, the company's gross margin was 19.33%/24.00%/24.36%, respectively. 24Q1 was +10.32pcts year-on-year, and +0.36pcts month-on-month. With the quarterly improvement of overseas business, the company's gross margin has recovered. On the cost side, sales expense ratios for the full year of 2023/23Q4/24Q1 were 7.24%/7.43%/4.64%, respectively, 24Q1 -6.07pcts year-on-year, and -2.79pcts month-on-month. Mainly companies are considering launch points for subsequent new staple food products, and the pace of cost investment has been adjusted. Management expense rates for the full year of 2023/23Q4/24Q1 were 7.85%/5.29%/6.34%, respectively, 24q1 -10.97pcts year-on-year, and +1.05pcts month-on-month. Taken together, the 23Q4/24Q1 companies' net interest rates were 3.65%/10.85%, respectively, and +7.20pcts month-on-month in 24Q1. Net interest rates without return to mother were 4.80%/10.37%, respectively, and +5.57pcts month-on-month in 24Q1. The company's profit level was further restored. Looking ahead to 2024, the company's overseas orders will return to normal levels, and capacity utilization at various production sites will be restored. Production input from the New Zealand plant is expected to cover part of depreciation and amortization, and the company's profitability is expected to increase.

Profit forecast, valuation and rating: We maintain the 2024-2025 net profit forecast of 1.25/171 million yuan, and add 2026 to the mother's net profit forecast of 209 million yuan; the corresponding EPS for 2024-2026 is 0.49/0.68/0.82 yuan, and the current stock price is 27/20/16 times, respectively. The company's overseas export business continues to improve, and the staple food layout helps the company develop in the long term and maintain an “increase” rating.

Risk warning: rising raw material prices, risk of exchange rate fluctuations, and the performance of staple foods falling short of expectations.