Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 7.06 billion yuan, -5.1% year on year; realized net profit of 750 million yuan, -6.5% year on year; of these, 23Q4 achieved revenue of 1.64 billion yuan, -21.8% year on year, and realized net profit of 197 million yuan, or -28.4% year on year. Meanwhile, the company plans to distribute a cash dividend of 5.00 yuan (tax included) for every 10 shares. 24Q1 achieved revenue of 2.25 billion yuan, -5% year-on-year, and realized net profit of 230 million yuan, or -17.8% year-on-year. The company's performance was lower than market expectations.

Revenue from C-end products declined, and the restaurant market performed well. By product, in '23, the company's quick-frozen rice products achieved revenue of 5.83 billion yuan, a year-on-year decrease of 9.5%; of these, traditional rice and noodle products such as rice balls and dumplings achieved revenue of 3.69 billion yuan, -15.7% year-on-year, while new-style pasta represented dim sum, custard buns, etc. achieved revenue of 2.14 billion yuan, +3.9% over the same period last year. Traditional pasta products were under pressure due to negative effects such as weak demand for C-side consumers last year, weak supermarket channels, and falling pork prices. Quick-frozen prepared food and refrigerated short-term storage products achieved revenue of 1.08/95 billion yuan respectively, +28.4%/-8.3% year-on-year, and shabu-shabu products maintained a relatively rapid growth rate. By market, the retail and innovation market achieved revenue of 5.57 billion yuan, -10.5% year-on-year; the catering market benefited from smooth channel development and achieved annual revenue of 1.43 billion yuan, +17.9%. By channel, the company continues to reduce losses on direct-managed KA channels, while increasing efforts to develop online channels. The revenue growth rate of distribution/direct-managed/direct-managed e-commerce channels was -2.2%/-18.9%/+20.7% year-on-year, respectively. Looking at the subregions, the company's revenue growth in the East/South/West/North Districts in 2023 was -16.2%/-16.2%/-4.8%/+5.9%, respectively. By the end of 2023, the number of the company's dealers had a net increase of 16 to 5,638

Gross margin has declined, and profitability is under pressure in the short term. In 2023/24Q1, the company's gross margin was 25.8%/26.6%, respectively, -2.2pp/-1.7pp year-on-year; the pressure on gross margin was mainly due to product restructuring.

In terms of cost ratio, the company's 2023/24Q1 sales expense ratio was -0.4 pp/ -0.4 pp to 11.5%/12.2% year on year, mainly due to the company's active reduction in product promotion expenses; the 2023/24Q1 management fee ratio was -0.6 pp/ -0.2 pp to 2.3%/1.9% year on year, mainly due to the company's continuous promotion of refined internal management.

Taken together, the company's 2023/24Q1 net margin was -0.2pp/-1.6pp to 10.6%/10.2% year-on-year.

Product channels are working together, and long-term performance is worth looking forward to. 1) Product side: On the basis of maintaining the steady growth of traditional rice and noodles, the company will increase its profit contribution rate by reducing costs and increasing efficiency; at the same time, it is expected that new and sub-new products will contribute to revenue growth; in addition, the company has cooperated with leading international meat suppliers, and the performance of new beef and lamb products is worth looking forward to. 2) On the channel side, the company is actively promoting direct loss reduction and steadily building a distribution system; at the same time, it is increasing the development of large B customers and the construction of small B-side social catering channels to continuously increase the penetration rate of the restaurant side; in addition, the company is actively speeding up the online channel layout, and the e-commerce channel is expected to maintain a growth rate of more than 50%. As a leader in frozen food, the company's long-term performance is worth looking forward to, driven by the dual reforms of product innovation and channel expansion.

Profit forecasting and investment advice. EPS is expected to be 0.86 yuan, 0.93 yuan, and 0.99 yuan respectively in 2024-2026, and the corresponding dynamic PE will be 14 times, 13 times, and 12 times, respectively, giving a “holding” rating.

Risk warning: The recovery on the restaurant side falls short of the expected risks, and the promotion of new products falls short of the expected risks.