Matters:
The company released its 2023 annual report and 2024 quarterly report. In '23, we achieved total operating income of 126.18 billion yuan, +2.4% year-on-year, net profit of 10.43 billion yuan, +10.6% year-on-year, net profit of 10.03 billion yuan after deduction of non-return to mother, +16.
8%; Q4 achieved total revenue of 28.77 billion yuan, -1.8% year-on-year, net profit to mother of 1.05 billion yuan, -23.5% year-on-year, net profit of 1.57 billion yuan after deduction of net profit not attributable to mother, +56.5% year-on-year. 24Q1 total revenue of 32.58 billion yuan, -2.6% year on year, net profit to mother was 5.92 billion yuan, +63.8% year over year, net profit without return to mother was 3.73 billion yuan, +8.0 percent year on year. Meanwhile, the company plans to pay a cash dividend of RMB 1.2 per share, with a dividend rate of 73.25%, an increase of 3.05 pcts over the previous year.
Commentary:
The 23Q4 Spring Festival stall disrupted revenue, and asset depreciation dragged down profits, but the increase in net interest rates for the whole year was still over realized.
Single Q4 liquid milk/milk powder and dairy/cold drink products achieved revenue of 201.1/7.68/310 million, compared with -3.4%/+1.9%/-16.9%. The decline in liquid milk was mainly due to weak demand compounded by the impact of the Spring Festival stalled schedule. The milk powder and cold drink business is still being adjusted. 23Q4 gross margin was 31.5%, +0.32pcts year on year, mainly benefiting from lower raw milk costs; sales/management/ financial expenses ratio was 18.8%/4.5%/0.4%, -0.33pcts/-0.7pcts/+0.31pcts year-on-year, and rate optimization driven by Spring Festival errors and lean fee investment. However, Q4 caused asset impairment losses of 1.03 billion yuan, accounting for 3.6% of revenue, +1.54 pcts year over year, mainly due to impairment of bulk powder and finished products, and impairment of biological assets of the subsidiary Youyuan Animal Husbandry. Furthermore, net revenue from changes in fair value accounted for -1.15% of revenue, -1.45 pcts year over year, and the comprehensive tax rate was -13.8% and -17.6 pcts year over year, all of which disrupted profits. However, looking at the full year, the company's net interest rate increased by 0.59pcts to 8.18%, exceeding the previous guideline of increasing net interest rates by 30 bps.
Active adjustments in 24Q1 liquid milk dragged down revenue, and profitability continued to rise. 24Q1 liquid milk/milk powder and dairy products/cold drinks achieved revenue of 202.6/74.3 billion, compared with -6.8%/-0.2%/+14.2%. The pressure on liquid milk performance was mainly due to the company taking the initiative to adjust large date products and integrate inefficient channels to boost product freshness and dealer profit levels; the milk powder business performed steadily under a high base, and cold drinks actively prepared for the peak season. The 24Q1 gross margin was 35.8%, +2.0pcts year over year, and the sales expense ratio was 18.51%, +1.4pcts year over year, mainly due to the increase in peak season expenses and the structure was optimized accordingly; the management/finance expense ratio was 4.48%/-0.81% year over year, flat /-0.61 pcts year over year, so 24Q1 net interest rate without return to mother was 11.48%, +1.53pcts year over year. In addition, the 24Q1 investment income was 2.58 billion, accounting for 8.0% of revenue, +8.0 pcts year on year. The main contribution was the sale of coal mining subsidiaries, so the net interest rate was 18.3%, a significant increase of +7.5 pcts year over year.
Under external pressure, 23 years showed resilience, and 24 years put quality first. In 23, the company's liquid milk, adult milk powder, and cold drink categories all ranked first. The market share of infant formula and cheese (offline) increased by 1.6 pcts, 0.6 pcts to 16.2% and 16.9% respectively. Under external pressure, the company's resilience was evident, and the share of all categories stabilized and even bucked the trend.
In 24, the company plans to achieve total revenue of 130 billion yuan and total profit of 14.7 billion yuan, corresponding to a year-on-year increase of 3% and 25.4% (we estimate that excluding the impact of one-time revenue from coal mines, total profit will increase by about 6%). In the current demand environment, the company is guided by more stable and solid goals, properly spray powder upstream, maintain stable animal husbandry partner operations, actively adjust channels and guarantee dealer profits downstream, and continue to consolidate the foundation of the entire industry chain.
Increased dividends and repurchases have strongly boosted shareholder returns. On the basis of capital expenditure peaking and further improvement in cash flow conditions, the company first continued to raise the dividend rate to 73.25%, and the second was to launch a repurchase plan, that is, it plans to repurchase shares at a price of no more than 41.88 yuan/share (inclusive), with a repurchase amount of 1 billion yuan (inclusive) to 2 billion yuan (inclusive). The number of shares to be repurchased is 2388-47.76 million shares, accounting for 0.38%-0.75% of the total share capital. We believe that under external pressure, the company's focus on the stability and quality of growth of the entire industry chain and the continuous consolidation of long-term competitiveness is a prerequisite for long-term cash flow stability. At the same time, a clear capital strategy, the company takes the initiative to increase dividends, and once again initiates repurchases, which is an act to effectively return shareholders and effectively enhance corporate value in the era of high-quality development.
Investment advice: Stable operation, attractive dividends, maintaining a target price of 40 yuan and a “strong” rating.
Combining the gradual recovery of demand during the year and the gradual implementation of company adjustments starting in Q2 to drive the achievement of the annual planning target, we gave an EPS forecast of 2.06/2.01/2.18 yuan for 24-26 (the original 24-25 forecast was 1.92/2.19 yuan), which corresponds to a PE of 14/14/13 times. Under the premise of steady operation, the company's current capital strategy to increase shareholder returns has been implemented. The dividend rate has reached 4.2%, and the return of nearly 5% after the implementation of the repurchase policy is highly certain. It has given a 24-year valuation nearly 20 times, maintained a target price of 40 yuan, and maintained a “strong push” rating.
Risk warning: demand recovery falls short of expectations, industry competition intensifies, raw milk prices fall beyond expectations, etc.