Incident: Sanquan Foods achieved revenue of 7.056 billion yuan in 2023, down 5.09% year on year, and realized net profit to mother of 749 million yuan, down 6.55% year on year. 4Q23/1Q24 achieved revenue of 16.41.254 billion yuan, a year-on-year decrease of 21.83%/5.01%, and realized net profit to mother of 1.97/230 million yuan, a year-on-year decrease of 28.63%/17.76%, in line with market expectations.

Revenue from prepared products grew steadily, and product innovation continued: due to the slow pace of consumer recovery and increased market competition, the company's C-side products are under pressure. In terms of products, revenue from rice and noodle products/refrigerated and short-term insurance products changed -9.46%/+28.44%/-8.29% year-on-year in 2023. Rice and noodle products account for high C-side revenue and are greatly affected by the supermarket system. Revenue continues to decline, and the revenue growth of prepared products with food and meat attributes is impressive. In order to cope with changes in consumer demand, the company has innovated in promoting new products. On the one hand, the company launched the “steam, fry, cook, fry, whatever you want” Gyoza King series products. Using the cooked skin process, the cooking time was greatly shortened. At the same time, the filling content of the product exceeded 70%, which significantly increased consumers' satisfaction with meals. On the other hand, the company attached importance to the healthy development of products, launched the coarse fiber rice dumpling series, pioneered the “same source of medicinal food” five-hong/five-black rice dumpling filling, which achieved a rapid increase in sales volume after the product was launched, giving full play to the advantages of the “Sanquan” brand on the C-side.

B-side growth is impressive, and e-commerce is expected to contribute a significant increase: from a channel perspective, retail and innovative market/catering market revenue in 2023 changed -9.58%/+17.93% year-on-year, and B-side revenue growth rate was clearly superior to C-side. In terms of sales model, distribution/direct/e-commerce revenue in 2023 changed -2.25%/-18.87%/+20.71% year-on-year, and e-commerce channels performed well. On the one hand, the company has grasped the recovery of B-side scenarios such as group meals and country cooking, while raising awareness of products and services. Products such as brown sugar pickles, Chinese hamburger embryos, cheese fish sticks, and small fennel fritters have further penetrated into chain catering companies. On the other hand, as a leading C-end frozen product, the company has a certain brand power and excellent growth momentum in e-commerce channels. The sales volume of “raw dumplings” has exceeded 100 million, which is expected to continue to provide incremental revenue for the company.

Rate optimization offset the decline in gross margin, and profitability remained stable: in 2023, the company achieved a gross profit margin of 25.84%, a year-on-year decrease of 2.23 pcts, which is a decrease in market competition and revenue share of high-margin products such as dumplings and rice balls; the sales expenses ratio is 11.48%, a decrease of 0.41 pcts year-on-year, which is more accurate investment in retail promotional materials and promoters; the management fee ratio is 2.30%, a decrease of 0.63 pcts year on year, mainly due to equity incentive costs being recovered. Overall, the company achieved a net profit margin of 10.62% in 2023, a slight decrease of 0.16 pcts year-on-year.

Profit forecast, valuation and rating: Considering that the current consumer environment is still under pressure, we lowered our 2024-25 net profit forecast to $727/796 million yuan, down 23%/28% from the previous one, and added the 2026 net profit forecast to 906 million yuan. The current stock price corresponds to the 2024-26 PE valuation to 15/14/12 times. The company's products and channels continue to innovate, and it is expected to become a new growth driver in the future, maintaining the “gain” rating.

Risk warning: downstream demand is slowing down, raw material costs are rising, and new product sales fall short of expectations.