Key points of investment

Event: The company released its 2023 annual report and 2024 quarterly report. According to the announcement, in 2023, the company achieved operating income of 3.625 billion yuan, a year-on-year increase of 15.90%, and achieved net profit of 280 million yuan, a year-on-year increase of 31.04%, and realized net profit after deduction of 231 million yuan, an increase of 32.76% over the previous year; the 23Q4 company achieved operating income of 1,647 million yuan, an increase of -4.20% over the previous year, and realized net profit of 271 million yuan, a year-on-year increase of -2.37%; the 24Q1 company achieved Operating income was 725 million yuan, up 6.76% year on year, achieving net profit of 25 million yuan, an increase of 331.26% year on year, and realized net profit of 20 million yuan after deduction, an increase of 382.57% year on year.

Annual report analysis: Ready-to-drink has grown rapidly, marketing expenses have increased, annual net interest rates have increased slightly, brewing repair growth has increased, and ready-to-drink performance is impressive. In 2023, the company achieved revenue of 3.625 billion yuan, +15.90% (Q1: +37.03%; Q2: +35.19%; Q3: +20.41%; Q4: +3.06%). By business, revenue from brewed products was 2,686 billion yuan, +9.37% over the same period. During this period, the product side launched two innovative and healthy products, such as fresh homemade oat milk tea and fresh coffee, which were well received by the market during the trial sales period. The company further strengthened its healthy product upgrade strategy while actively exploring pan-brewed categories. The marketing side strengthened the warm image of the brand and expanded brand communication through accurate marketing of new media and mass media program promotion. The channel side also insisted on implementing a sinking strategy and early layout during the peak season to drive rapid sales of brewed products during the peak season 23; year Revenue from ready-to-drink products was 901 million yuan, +41.16%. The core product, Meco juice tea, continues to enrich flavor innovation, actively explores general snack scenarios, and accurately captures gift consumer demand and was well received by the market. Lan Fangyuan frozen lemon tea achieved rapid pre-tax sales revenue of over 200 million yuan in the first year of official launch with authentic Hong Kong-style flavor and 0 sucrose. The company also implemented comprehensive brand promotion online and offline. At the same time, an independent ready-to-drink business sales team with 1,000 people was set up to improve channel service capabilities, which is expected to enable terminal sales to continue to grow rapidly. In addition, the company's dealer team has been continuously optimized. By the end of '23, the number of the company's dealers had increased by 199 to 1,531 over the same period last year, including 406 new dealers and 207 dealers replaced. The number of full-time instant drink dealers increased dramatically.

Marketing investment increased, and net interest rates increased slightly throughout the year. The gross margin of the 2023A/Q4 company was 37.53%/43.89%, compared with +3.73 pct/+3.15 pct, mainly due to reduced raw material procurement costs and efficiency improvements brought about by lean transformation. The 2023A/Q4 sales expense ratio was 23.73%/17.36%, +5.80pct/+6.79pct, mainly due to the company increasing advertising expenses and setting up a ready-to-drink sales team to increase labor expenses. The management cost ratio was 6.28%/3.88%, -1.08pct/+0.04pct year over year, and the year-on-year dimension declined. Taken together, the 2023A/Q4 company's net interest rate was 7.72%/16.80%, +0.88pct/-1.29pct year-on-year. The decline in net interest rate in 23Q4 was mainly due to increased marketing expenses.

Quarterly Report Analysis: Brewing is growing steadily. Ready drinking will start the peak season, net interest rates will significantly improve steady growth in brewing, and ready to drink will start the peak season. 24Q1's revenue from brewed products was 485 million yuan, +5.46% year on year, and revenue from ready-to-drink products was 234 million yuan, +10.12% year over year. At present, brewing has reached the end of the peak season. Channel inventory is expected to perform well. Along with healthy product upgrades and channel decline, it is expected to achieve steady growth throughout the year. The ready-to-drink business is about to enter the peak summer sales season. The company continues to strengthen the construction of frozen terminals and increase sales outlets. It is expected to achieve rapid growth throughout the year around Me Co fruit tea in cups and Lan Fangyuan frozen lemon tea.

Rate control is good, and profitability has increased year over year. The 24Q1 company's gross margin was 33.64%, +2.62 pct year over year, or mainly due to cost optimization brought about by increased scale effects. On the cost side, the 24Q1 company's sales expense ratio was 24.01%, -2.81 pct year on year. It is expected to benefit from improved cost investment efficiency. The management/R&D/finance expense ratio is 7.65%/1.04%/-2.66%, -0.33pct/+0.06pct/-0.49pct year on year. The final net interest rate is 3.49%, +2.63 pct year on year, and profitability improved significantly.

Future outlook: Brewing innovation and upgrading, ready-to-drink contributes to the second curve. Specifically, the brewing business continues to promote healthy product upgrades and channel sinking; strengthening optimization, upgrading and market exploration, such as selling fresh oats; the ready-to-drink business continues to develop two major products, Meco cup fruit tea and Lan Fangyuan frozen lemon tea. Among them, Meco cup fruit tea will strengthen product communication and marketing, and the channel side will focus on leading cities. By creating model markets and building profit models, it also explores consumer opportunities for gift-packed homewear to empower growth. Lan Fangyuan frozen lemon tea also continues to strengthen existing achievements and gather high priority cities through high priority cities. School, build Model markets, build profit models, and actively explore channels such as catering and retail to quickly seize the market. During the peak season, the company will continue to strengthen terminal freezing construction, increase sales outlets, and raise the level of freezing. In addition, the company will continue to develop and optimize dealers and improve compatibility with the ready-to-drink business, thus helping to market products. At the same time, the company will also actively sort out and optimize internal management operations to enable long-term development.

Investment advice: The company adheres to the two-wheel drive strategy, and the healthy upgrading and steady development of brewed products. The potential for ready-to-drink products is improving and poised. With subsequent model markets successfully rolled out across the country, diversified channel expansion, and increased marketing and promotion efforts, etc., the flexibility of ready-to-drink performance is expected to gradually be unleashed. Coupled with the appointment of a new general manager to continue to strengthen refined internal management and improve operational efficiency, it is expected that it will continue to achieve better development in the future. The company's revenue for 2024-2026 is estimated to be 42.773/49.15/5.586 billion yuan respectively, up 17.9%/15.0%/13.7% year on year, and net profit to mother of 3.46/4.35/ 505 million yuan, up 23.6%/25.7%/16.0% year on year, corresponding EPS of 0.84/1.06/1.23 yuan, respectively. The first coverage gave it a “buy-B” rating.

Risk warning: Market demand changes, industry competition intensifies, channel expansion falls short of expectations, product sales fall short of expectations, etc.