Incident: The company released the 2023 report and the 2024 quarterly report. In 2023, it achieved operating income of 10.99 billion yuan (+9.8%), realized net profit of 430 million yuan (+19.3%), and realized net profit of non-return to mother of 450 million yuan (+57.9%); 2024Q1 achieved operating income of 2.61 billion yuan (+3.7%), and realized net profit of 90 million yuan (+46.9%). In addition, the company plans to distribute a cash dividend of 1.50 yuan (tax included) for every 10 shares to all shareholders.

DTC's growth rate remained leading, and 24Q1 was adjusted by the merger range and the growth rate slowed down. 1. Liquid milk achieved revenue of 9.76 billion yuan in 2023, an increase of 11.2% over the previous year. The company adheres to the “fresh and sour” category development strategy. Product iteration is rapid, and new products account for 12% of revenue in 2023, laying the foundation for subsequent growth. 2. By channel, direct management and distribution achieved revenue of 5.59 billion yuan (+10.2%) and 4.25 billion yuan (+12.4%) respectively in 2023.

Among them, the revenue growth rate of DTC business exceeded 15%, and the growth rate of far-field e-commerce and independent subscription exceeded 40% and 15% respectively.

3. 2024Q1 was affected by an adjustment in the output of a yogurt cow, and the revenue growth rate slowed.

Profitability continues to increase. 1. In 2023, 2024Q1 gross margins were 26.9% (+2.8pp) and 29.4% (+2.3pp), respectively, mainly due to lower raw milk prices and product structure optimization. 2. The 2023 sales expense rate, management expense rate, R&D expense ratio, and financial expense ratio were 15.3% (+1.7pp), 4.3% (-0.4pp), 0.4% (flat), and 1.5% (flat); the 2024Q1 sales expense ratio, management fee rate, R&D cost rate, and financial expense ratio were 17.1% (+1.6pp), 5.1% (+0.7pp), 0.4% (-0.1pp), and 1% (-0.5pp), respectively. 3. In 2023, 2024Q1 net interest rates were 4% (+0.4pp) and 3.6% (+1.1pp), respectively, and net interest rates continued to rise.

Clear strategic planning to achieve high-quality development. The company released its 2023-2027 strategic plan, which will strive for compound double-digit revenue growth, double net interest rate, and achieve high-quality development with endogenous growth as the main focus and supplemental mergers and acquisitions. 1) Product side: With the fresh cube strategy as the core, low-temperature fresh milk and low-temperature yogurt as key categories, we promote the five-year compound growth rate of high-end fresh milk not less than 20%, drive the growth of low-temperature specialty yogurt through product innovation, and strive to achieve a compound growth rate of more than 10% for new products in five years. 2) Channel side: Using the DTC business as the first engine for channel growth, the 2027 revenue share target is 30%, and the digital user target is 50 million.

Profit forecasting and investment advice. The company's net profit for 2024-2026 is estimated to be 570 million yuan, 710 million yuan, and 840 million yuan respectively, and EPS is 0.66 yuan, 0.82 yuan, and 0.97 yuan respectively. The corresponding dynamic PE is 15 times, 12 times, and 10 times, respectively, maintaining a “buy” rating.

Risk warning. Risk of large fluctuations in raw milk prices; risk of high-end upgrades falling short of expectations; food safety risks.