On April 25, 2024, Sanquan Foods released the 2023 Annual Report and the 2024 First Quarter Report.

Key points of investment

Market demand is still weak, and investment efficiency continues to improve

The company's total revenue for 2023/2023Q4/2024Q1 was 70.56/16.41.254 billion yuan respectively, down 5%/22%/5%, respectively, and net profit attributable to mother was 749/1.97/230 million yuan respectively, down 7%/29%/18% respectively, mainly due to pressure on market demand and increased industry competition. On the profit side, due to pressure on high-margin dumpling/rice dumpling sales, the company's gross margin decreased by 2 pct/2pct to 25.84%/26.60% respectively; due to the more accurate investment of retail sales materials and promoters, the 2023/2024Q1 sales expense ratio was reduced by 0.4 pct/0.4 pct to 11.48%/12.23%, respectively, and the management expense ratio was 2.30%/1.87%, respectively. The same reduction of 1 pct/0.2 pct was mainly due to the impact of equity incentive fee rebounds, etc. As a result, the company's net interest rate for 2023/2024Q1 was 10.62%/10.19%, respectively, a decrease of 0.2 pct/2 pct, respectively. On the cash flow side, 2024Q1's net operating cash flow was 167 million yuan (2023Q1 was -273 million yuan), mainly due to time differences in receipt of partial repayment from the collection business and settlement of purchase payments in the current period. In the dividend plan, the company pays a cash dividend of 5 yuan for every 10 shares to all shareholders. The dividend rate is 59%, which is a significant increase over the previous year.

Quick-frozen rice was under pressure for a short period of time, and some single products performed well

Dumpling/rice dumpling market performance is under pressure. In 2023, the company's revenue for frozen noodle rice products was 5.829 billion yuan (same decrease of 9%), sales volume was 609,500 tons (same decrease of 6%), and the tonnage price was 0.96 million yuan/ton (same decrease 4%). Volume and price fell, due to the high base in 2022. Combined with the fall in pork prices, the cost performance ratio of quick-frozen dumplings declined compared to the same period; due to delays in the Spring Festival, rice dumpling revenue declined in 2023 compared to the same period; due to delays in the Spring Festival, there was a recovery in rice dumplings 2024Q1, but the overall demand side was still under pressure. In 2024, the company responded to industry competition through accurate cost investment, continued to build a medium to high-end extension of Dumpling King products, develop functional rice dumplings, and continuously optimize the product structure. The volume and price of quick-frozen products increased rapidly. In 2023, the company's revenue for quick-frozen prepared food was 1,076 million yuan (up 28%), sales volume was 78,500 tons (same increase of 6%), and the tonnage price was 13,700 yuan/ton (same increase 21%), showing a sharp upward trend in volume and price. Among them, revenue from individual products such as Xiaolongbao//grilled sausage increased year-on-year. Sales of refrigerated and short warranty products are under pressure. In 2023, the company's revenue for refrigerated and short warranty products was 95 million yuan (same decrease of 8%), sales volume was 0.77,000 tons (same decrease of 9%), and the tonnage price was 12,300 yuan/ton (same increase of 1%).

Competition in supermarket channels intensifies, and B-side development continues to advance

North District's performance was relatively steady. The company's revenue in East District/South District/West District/North District in 2023 was 13.19/11.78/14.32/3.127 billion yuan, respectively, -16%/-5%/+6% year-on-year. The supermarket channel is expected to continue to be under pressure, and B-side development efforts will increase. In 2023, the company's distribution/direct/direct e-commerce revenue was 55.18/12.54/229 million yuan, respectively, -2%/-19%/+21% compared with the same period last year. E-commerce channels have shown outstanding performance; competition in direct supermarket channels has intensified. 2024 is dominated by controlled development, and is expected to remain under pressure in the future. The company has made deep adjustments to the BC-side channel structure to promote the development of B-side channels such as group meals/banquets. At the same time, in terms of organizational structure, the company is promoting competition for management positions for grass-roots business personnel and improving the team's market acumen. It is expected that channel enthusiasm will increase markedly after the run-in period of personnel integration.

Profit forecasting

As a leading company in frozen rice and noodle products, the company's brand potential is still strong. We are optimistic that the company will optimize and adjust the channel/organizational structure, and it is expected to release potential energy after market demand recovers. According to the annual report and quarterly report, the 2024-2026 EPS is expected to be 0.94/1.04/1.14 yuan, respectively. The current stock price corresponds to PE 13/12/11 times, respectively, maintaining a “buy” investment rating.

Risk warning

Macroeconomic downside risks, new product promotion falls short of expectations, and food and beverage market progress falls short of expectations.