Incident: Qianhe Flavors released its annual report for '23 and its quarterly report for '24. The realized revenue/net profit attributable to mother/net profit after deducting non-attributable net profit in '23 was 32.07/5.30/530 billion yuan, respectively, +31.6%/+54.2%/+56.7% year-on-year, respectively.

23Q4 realized revenue/net profit attributable to mother/net profit after deduction of net profit of $885/1.43/144 million yuan, respectively, or -0.8%/-8.5%/-7.8% year-on-year, respectively. 24Q1 realized revenue/net profit attributable to mother/ net profit after deduction of net profit not attributable to mother was $895/1.55/ 152 million yuan, respectively, +9.3%/+6.7%/+4.7% year-on-year, respectively.

Coverage of distribution channels has been increased in 23 years, and the main business soy sauce is growing well. By product, soy sauce achieved revenue of 2,040 billion yuan in '23, +34.9% year-on-year; vinegar achieved revenue of 422 million yuan, +11.8% year-on-year. 23Q4/24Q1 soy sauce revenue was -2.9%/+9.1%, respectively; vinegar revenue was -10.9%/-6.2%, respectively. The main reason for the increase in revenue in the soy sauce business in '23 is that products meet the industry's trend of zero soy sauce additives, launch new products such as low-priced versions with zero additives, optimize the product price system, and actively explore the market. Revenue growth in 23Q4 and 24Q1 slowed year-on-year, mainly due to the high base for the same period last year. By region, East/South/Central/North/West revenue was +30.9%/+26.0%/+27.1%/+23.8%, respectively; 24Q1 East/South/Central/North/West revenue was +4.4%/+43.3%/+28.4%/+10.5%/-0.7%, respectively. The western part of the base camp continued to cultivate intensively, and the Waifu market grew significantly. The company strengthened its distribution channel coverage. The total number of dealers at the end of 23/24Q1 was 3250/3356 respectively, a net increase of 1020/106 compared to the beginning of each period, driving +44.8%/+10.4% of the revenue of the 23/24Q1 distribution model year over year.

Increased scale effects, declining costs, and product structure upgrades boosted the 23-year gross profit margin. The gross margin of the company in '23/24Q1 was 37.1%/36.0%, respectively, +0.59/-3.1 pcts year-on-year, respectively. The increase in gross margin in '23 was mainly due to a reduction in packaging costs and miscellaneous charges, and an increase in the revenue share of zero-additive products. The company's expense rates for the 23/24Q1 period were 17.9%/16.0%, respectively, -0.9/-2.1pcts year-on-year, respectively. Among them, the sales expense ratio for '23 and 24Q1 was 12.2%/11.8%, respectively, -1.4/+0.1 pcts year on year. The decline in sales expenses in '23 was mainly due to improved investment efficiency, and the share of revenue in supermarket channels with higher rates declined. The management expense ratios in '23 and 24Q1 were 3.9%/2.7%, respectively, compared to +0.9/-0.9 pcts. The increase in management expenses in '23 was mainly due to the increase in equity incentive expenses. Net interest rates for '23/24Q1 were 16.5%/17.30%, respectively, +2.4/ -0.4 pcts year-on-year, respectively.

Product matrix expansion, channel intensive cultivation, and continuous development of the national condiment market. In '23, the company demonstrated strong business resilience by expanding the scope of marketing, optimizing the product price system, actively upgrading, and controlling costs and reducing fees. In 24 years, the company will continue to carry out category innovation and functional innovation on the product side, enrich the product matrix, optimize the price system, and implement accurate product strategies according to different consumer needs. On the channel side, on the one hand, expand and strengthen existing channels, consolidate the market foundation, and on the other hand, promote the expansion of new channels and accelerate the layout of distribution channels.

Profit forecast, valuation and rating: Considering the intensification of competition in the industry, we lowered the company's net profit due to mother for 24-25 to RMB 6.40/776 million yuan respectively (down 9.1% from the previous forecast), and added the net profit forecast to RMB 910 million for 26 years. The current stock price corresponding to the 24-26 PE is 27x/22x/19x. The company's products are in line with the healthy development trend of the industry, are optimistic about the company's future development prospects, and maintain the “gain” rating.

Risk warning: Distribution channel expansion falls short of expectations, market competition intensifies, food safety risks.