Incident: On May 21, 2024, New Dairy held a shareholders' meeting and investor meeting. The company reviewed the business situation in 2023 and answered key issues such as the current state of the industry, the company's development focus and strategic plan for 2024. The summary feedback is as follows:

Strategically, adhere to the goals of the five-year plan and promote core business growth. Although the recovery of the dairy industry fell short of expectations, the company's performance in 2023 basically met the strategic requirements of the five-year plan. In 2024, it will still promote core business growth in accordance with the requirements of the five-year plan, strive to achieve continuous revenue growth, and accelerate net interest rate growth.

In terms of categories, low-temperature fresh milk and low-temperature specialty yogurt are the core key categories to optimize the product structure. The company adheres to a deep “fresh strategy”. In 2020-2023, the company's low-temperature fresh milk sales achieved high double-digit growth, and the national market share increased steadily. Looking at specific products: 1) “24 hours”: In 2023, the company's “24 hour” high-end series increased by nearly 40% year-on-year. In 2024, the company will launch the “24 hour” high-end series fresh milk to more subsidiaries, further increasing the proportion of high-end series products.

2) Asahi Vipshop: As a high-end positioning brand, Vipshop has maintained rapid growth over the past few years. BC two-wheel drive, and the increase in C-end brand power was successfully transformed into B-side premium power. In 2024, the company has high hopes for Vipshop. In addition, “Today's Fresh Milk Shop” in low temperature fresh milk created the Guochao milk brand. Among low temperature specialty yoghurt, “active” positioned functional high-end yogurt, and “original intention” focused on zero additives, were displayed as key products at the conference.

Deeply cultivate the region, continue to promote urban agglomeration strategies, seize the dividends of channel transformation, and use digital platforms to empower. 1) The continuous expansion of urban agglomerations. The increase in the number of urban agglomerations and the acceleration of penetration from core cities to surrounding markets achieved growth. 2) Seize the dividends of channels such as mass sales of snacks.

In 2023, the company established a good partnership with the snack mass sales channel, and the channel grew significantly. 3) Promote digital marketing. Combining different scenarios of local life, the company accelerated the promotion and application of the “Fresh Go” local digital platform. In 2023, the application scope was expanded to 10 dairy products subsidiaries. The total annual sales volume of all platforms exceeded 2 million orders, an increase of more than 20% over the previous year.

Focus on new quality production and build a moat with a comparative advantage. We believe that from R&D and production to the optimization and upgrading of the supply chain to terminal services, the company has established a moat with comparative advantages to achieve sustainable development under the pressure of industry growth: 1) Focus on scientific and technological innovation to help develop new products. The company has established a “science and technology research institute+molecular power” technology two-wheel drive to form an organic combination of a scientific and technological innovation platform and an achievement transformation platform, and continuously launch differentiated new products to help achieve a double digit ratio of new products. 2) Comprehensive digital transformation helps improve supply chain efficiency and achieve remarkable results on the marketing side.

On the supply chain side, it mainly focuses on digital factories, lean management and optimization of PMC, and digitization of milk sources to meet the flexible production needs of low-temperature milk, improve operational efficiency, and improve the scope of the milk source management system. In terms of digital marketing, “user-centered” service transformation has been promoted, and “Fresh Go”'s support for the business has increased markedly. In 2023, the number of digital users in the region exceeded 19 million, an increase of nearly 50% over the previous year, and the repurchase rate and retention rate of users who purchased cyclically throughout the year increased markedly.

Despite challenges in the industry, the company's profitability is expected to continue to improve with “freshness” as a breakthrough point and empowered by new quality production optimization. We believe that under the trend where demand in the dairy industry continues to weaken and recover, the company has established a brand image with “freshness” as the core value, and has continuously strengthened the low-temperature product matrix. The category structure is improving. Combined with the current continuous cost dividend of raw milk, gross margin is expected to increase. On the supply chain side, the company innovates the supply chain and improves efficiency through digital upgrading, and there is room for optimization of manufacturing costs. Furthermore, non-recurring profit and loss are expected to improve in 2024 compared to 2023. Overall, the company has strong confidence in improving profitability and is expected to achieve high-quality development under pressure from the industry.

Profit forecast: We expect the company to achieve net profit of 536/6.91/896 million yuan in 2024-26, +24%/+29%/+30% year-on-year, respectively. The current stock price corresponds to 2024-26 PE of 17x/14x/10x respectively, maintaining the “recommended” rating.

Risk warning: food safety incidents, market demand falling short of expectations, channel expansion falling short of expectations, increased industry competition, dairy farming diseases and natural disasters, etc.