Incident: Erie releases its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved revenue of 126.2 billion yuan, +2.44% year on year; net profit to mother of 10.429 billion yuan, +10.58% year on year; net profit without return to mother of 10.026 billion yuan, +16.78% year on year. Among them, 23Q4 achieved revenue of 28.8 billion yuan, -1.82% year on year; net profit to mother of 1,048 billion yuan, -23.47% year over year; net profit after deducting non-return to mother of 1,573 billion yuan, +56.49% year over year. In 24Q1, the company achieved revenue of 32.6 billion yuan, -2.58% year on year; net profit to mother of 5.923 billion yuan, +63.84% year over year; net profit after deducting non-return to mother was 3,728 billion yuan, +12.39% year over year.
Comment:
Revenue grew steadily in '23, and the revenue side was under pressure in 24Q1. In 2023, with macroeconomic demand recovering slowly and the Spring Festival being unreliable, the revenue side continued to achieve steady growth. By product, liquid milk showed a recovery trend, with annual revenue of +0.72%; the milk powder and dairy products business relied on rapid growth in the adult powder sector, with annual revenue of +5.10%; the cold drink business continued to maintain a high growth trend, with annual revenue of +11.72% year-on-year. Specifically, in 23Q4, the liquid milk business revenue was -3.44% year-on-year; the milk powder and dairy products business continued to recover, with revenue +1.91% year-on-year; the cold drink business sold less in winter, and revenue was -16.84% year-on-year.
In 24Q1, the company experienced negative growth on the revenue side due to the still slow recovery in consumer demand. Among them, revenue from the liquid milk business was under pressure, with revenue of -6.81%; revenue from the milk powder and dairy products business was stable, -0.20% compared to the same period; and the cold drink business continued its rapid growth trend, with revenue +14.20% year-on-year.
The profit margin target for '23 was exceeded, and profit increased significantly in 24Q1 due to investment income. In 2023, the company's overall gross margin reached 32.58%, an increase of +0.32pct over the previous year. On the product side, it was mainly due to an increase in the gross margin of liquid milk, while the increase in gross margin was mainly due to a decrease in the cost side. On the cost side, the company continued to reduce costs and increase efficiency, and the sales expense ratio, and the management expense ratio all declined to varying degrees. As a result, the company's net profit margin to mother increased by 60 bps when asset impairment losses accounted for a higher share compared to the same period in 2022, exceeding the annual profit margin improvement target. In 24Q1, the company's gross margin reached 35.79%, +2.02pct year-on-year. We speculate that this is due to the continued decline in milk prices and an increase in the product category structure. Although the sales expense ratio and management expense ratio increased slightly year on year, the investment income from the sale of Changji Shengxin greatly increased profits. After excluding this income, the net profit margin without return to mother reached 11.44%, +1.52 pcts year on year.
The leading position is stable, grasping innovation, efficiency and new tracks. Despite short-term fluctuations in macro demand, the company's leading position at various racetracks was further consolidated in 2023. In 2023, the company's liquid milk business scale and market share steadily ranked first in the market; overall milk powder sales also ranked first in the Chinese market; cold drinks remained number one in the market for 29 consecutive years. In 2023, the company invested heavily in innovation. On the one hand, it made efforts in forward-looking technology, and the revenue share of innovative products increased to 16.8%; on the other hand, it promoted the intelligent transformation of the entire industry chain, and the operating efficiency of the company's entire chain was greatly improved. In addition, the company accelerated the layout of the health industry throughout the life cycle, and divided the milk powder business into an adult nutrition division and an infant nutrition division to pave the way and prepare for a new nutrition and health track throughout the life cycle.
Looking forward to 24 years: Steady progress. Despite the slow pace, expectations for a recovery in dairy consumption remain optimistic. On this basis, the company expects revenue to reach 130 billion yuan this year, +3.03% year over year; total profit of 14.7 billion yuan, +25.41% year over year; after excluding new profits from the sale of Changjisheng, total profit is 12.121 billion yuan, or +3.41% year over year. The overall trend is steady and progressive.
High dividend combined repurchases strengthen investor confidence. At the same time, the company announced that it plans to distribute a cash dividend of RMB 1.2 (tax included) per share, accounting for 73.25% of net profit returned to the mother in '23, and the dividend payment rate increased year-on-year. At the same time, the company plans to use its own capital of 1-2 billion yuan to repurchase and cancel stocks through centralized bidding transactions to enhance investor confidence and increase investor returns.
Profit forecasting and investment ratings: Recovery remains optimistic, seizing bottom opportunities. Despite short-term fluctuations in dairy consumption, we remain optimistic about its recovery. According to our research, there is a positive correlation between per capita consumption of dairy products and per capita GDP, and China's per capita GDP growth rate is still in the middle single digit range. We have reason to believe that consumption of dairy products in China is expected to increase further in the medium to long term. At the same time, the company's dividend ratio has now reached 4.19%, which is the highest in the past ten years. The price-earnings ratio (TTM) valuation has also reached the bottom range in the past ten years. Combined with the company's active repurchases, the bottom characteristics are obvious. We expect the 2024-2026 EPS to be 2.00/1.91/2.12 yuan, corresponding to 2024-2026 14X/15X/13X PE, maintaining the company's “buy” rating.
Risk factors: food safety issues, increased competition in the industry