Incident: New Dairy released its 2023 annual report and 2024 quarterly report. For the full year of 2023, it achieved operating income of 10.987 billion yuan, +9.80% year over year; net profit to mother of 431 million yuan, +19.27% year on year after adjustment; net profit after adjustment of 465 million yuan, +57.86% year over year. 23Q4 achieved operating income of 2,793 billion yuan, +10.56% year over year; net profit to mother of 50 million yuan, -2.62% year on year after adjustment; net profit without return to mother of 74 million yuan, +56.56% year on year after adjustment. 24Q1 achieved operating income of 2,614 billion yuan, +3.66% year over year; net profit to mother of 90 million yuan, +46.93% year over year; net profit after deducting non-return to mother of 100 million yuan, +33.75% year over year.

Low-temperature fresh milk is growing positively, and the D2C channel is developing well. The company's 24Q1 revenue growth slowed mainly due to the active divestment of the “one yogurt cow” business. 1) By product, liquid milk/milk powder/other products achieved revenue of 97.55/ 0.78/ 1,153 billion yuan respectively in 2023, +11.15%/+11.28%/-0.53% year-on-year. Among them, revenue from low-temperature fresh milk achieved double-digit year-on-year growth, and revenue from the low-temperature yogurt category achieved medium single-digit year-on-year growth. The company continues to promote the layout of new products, and the share of revenue contributed by new products in 2023 continues to be in double digits. 2) By region, Southwest China/East China/Northwest/North China/North China/other regions achieved revenue of 40.95/30.20/14.24/11.09/1,339 billion yuan in 2023, +9.98%/+4.80%/-0.97%/+39.03%/+14.90% compared with the same period last year. 3) By channel, direct marketing/distribution channels achieved revenue of 5,588/4.247 billion yuan respectively in 2023, +10.22%/12.41% year-on-year. Among them, e-commerce channels achieved revenue of 880 million yuan in 2023, +20.51% year-on-year. The D2C channel layout was smooth. Revenue increased by more than 15% year on year, and revenue from far-field e-commerce business increased by more than 40% year over year.

The decline in raw milk prices boosted gross profit margins, and the profitability of subsidiaries was good. In terms of gross margin, the company's gross margin for the full year of 2023/23Q4/24Q1 was 26.87%/25.25%/29.38%, respectively. 24Q1 was +2.32pcts year over year, and +4.13pcts month-on-month. The decline in raw milk prices was compounded by product structure optimization, and the company's gross margin was further increased. On the cost side, sales expenses rates for the full year of 2023/23Q4/24Q1 were 15.28%/15.91%/17.08%, respectively, 24Q1 +1.59pcts year over year, and +1.17pcts month-on-month, mainly due to an increase in promotion expenses and brand building investment. Management expense rates for the full year of 2023/23Q4/24Q1 were 4.28%/4.24%/5.10%, respectively, 24q1 +0.67pcts year-on-year, and +0.86pcts month-on-month. Taken together, the company's net interest rate for the full year of 2023/23Q4/24Q1 was 3.92%/1.79%/3.43%, respectively. 24Q1 was +1.01pcts year over year, and +1.65pcts month-on-month, and profitability increased. Among the subsidiaries, Sichuan Dairy/Kunming Seran/Huanmei Dairy/Qingdao Qinpai/Vipshop had net profit margins of 8.34%/4.84%/8.69%/5.42%/7.16%, respectively, compared with +2.04/+1.14/+0.39/+0.35/+0.37pcts, and the company's profitability increased to varying degrees.

Profit forecast, valuation and rating: Considering that terminal sales have yet to recover, we lowered our 2024-2025 net profit forecast to 5550/663 million yuan (down 12.94%/13.52% from the previous year), and added the 2026 net profit forecast to be 742 million yuan; the corresponding EPS for 2024-2026 was 0.64/0.77/0.86 yuan, and the P/E corresponding to the current stock price is 15/13/11 times, respectively. Profitability continues to increase as the company's strategy progresses, maintaining the “buy” rating.

Risk warning: Sales recovery fell short of expectations, raw material costs fluctuated, and core product growth fell short of expectations.