Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 10.987 billion yuan, up 9.80% year on year; net profit to mother of 431 million yuan, up 19.27% year on year; net profit after deducting non-return to mother was 465 million yuan, up 57.86% year on year. 2024Q1 achieved operating income of 2,614 billion yuan, a year-on-year increase of 3.66%; realized net profit of 90 million yuan, an increase of 46.93%; and realized net profit of 100 million yuan after deduction, an increase of 33.75% over the previous year. In addition, the company plans to distribute a cash dividend of 1.50 yuan (tax included) to all shareholders for every 10 shares, with a dividend rate of 30.14%.
The core categories are growing positively, and the DTC channel is developing well. The company's liquid milk and dairy manufacturing industry achieved revenue of 9.834 billion yuan in 2023, an increase of 11.16% over the previous year. 1) By product, liquid milk/milk powder/ other products achieved revenue of 97.55/ 0.79/1,153 billion yuan respectively in 2023, +11.15%/+11.28%/-0.53%, respectively. The categories focused on low-temperature fresh milk and specialty yogurt. The share of new product revenue remained in double digits for three consecutive years. The “24 hour” high-end series products grew by nearly 40% year on year, and the core categories grew positively. 2) By region, in 2023, Southwest China/East China/North China/Northwest/Other regions achieved revenue of 40.95/30.20/11.09/14.24/13.39 billion yuan respectively, +9.98%/+4.80%/+39.03%/-0.97%/+14.90%, respectively, with good growth in most regions. 3) By channel, direct/dealer channels achieved revenue of 5,588/4.247 billion yuan, respectively. Among them, e-commerce channels achieved revenue of 880 million yuan, +20.51% year over year, and DTC channel revenue increased by more than 15% year over year. Among them, far field e-commerce business/independent subscription business increased by more than 40%/over 15% year on year, respectively.
Structural optimization & cost reduction and efficiency, profitability continues to improve. 1) In terms of gross margin, the gross margin of the 2023/2024Q1 company was 26.87%/29.38%, respectively, +2.84pct/+2.32pct, respectively. The increase in gross profit was mainly due to an increase in overall sales scale, structural optimization, and cost reduction and efficiency. 2) In terms of expenses, the company's sales expense rate/ management expense rate/ R&D expense rate/ financial expense ratio in 2023 were 15.28%/4.28%/0.43%/1.47%, respectively, and remained flat compared to +1.72pct/-0.42pct/ -0.05pct/ respectively. The increase in sales expenses was mainly due to the company's increased investment in market promotion and key brand promotion; 2024Q1 company's sales expense rate/ management expense rate/ R&D expense rate/ financial expenses rate were 17.08%/5.10%/0.38%, respectively/ 1.04%, +1.59pct/+0.67pct/-0.08pct/-0.54pct, respectively. 3) In terms of net interest rate, the company's net interest rate for 2023/2024Q1 was 3.98%/3.57%, respectively, +0.37pct/+1.09pct, respectively, and profitability continued to increase.
Five-year strategic plan, “Fresh Cube” high-quality growth. According to the “2023-2027 Strategic Plan” issued by the company, 24 is the second year of strategy implementation: product-side, focusing on the two major categories of low-temperature fresh milk and specialty yogurt, deepening innovative research and development and optimizing the product structure; three-dimensional channel-side development, organic integration of online and offline regions, public and private domain development, and using the “DTC” model as a key driving force for channel growth. The company will take endogenous growth as the lead, and strive to achieve continuous revenue growth and increase net interest rates around the “Fresh Cube Strategy”, thereby driving the company towards high-quality growth.
Investment advice: The company firmly adheres to the Fresh Cube strategy, differentiates competition around core categories, DTC and emerging channels, focuses on endogenous growth and management efficiency improvement, maintains product and brand vitality with strong innovation capabilities, and is expected to have plenty of room to improve profitability. The company's EPS is expected to be 0.64, 0.78, and 0.94 yuan respectively in 2024-2026, and the current stock price is 17, 14, and 12 times PE, respectively, maintaining a “buy” rating.
Risk warning: Increased industry competition, fluctuating raw milk prices, downstream demand falling short of expectations, profit growth falling short of expectations, food safety issues.