Key points of investment:
The company's performance is under pressure in the short term. According to the company's announcement, in 2023, it achieved total revenue of 7.056 billion yuan, -5.09% year-on-year; net profit to mother of 749 million yuan, -6.55% year-on-year; net profit after deduction of 646 million yuan, -8.95% year-on-year. Among them, 2023Q4 had revenue of 1,641 billion yuan, or -21.83% YoY; net profit to mother was 197 million yuan, -28.63% YoY. In the first quarter of 2024, the company's revenue was 2,254 billion yuan, -5.01% YoY; net profit to mother was 230 million yuan, -17.76% YoY. Due to increased competition in the industry market and the negative impact of long-term low pork prices on sales of stuffed products, the company's dumpling category fell under pressure in both directions in 2023, causing short-term pressure on the company's performance.
There is still room for growth in the market size of the industry. Referring to Japan, the United States and other countries, food externalization and restaurant chains have jointly promoted a rapid increase in demand for standardized frozen products by catering companies. According to the company announcement, the chain rate of restaurants in China in 2022 was 19%, the US was 58.4%, and Japan was close to 50%. Compared to mature markets such as the US and Japan, there is still plenty of room for restaurant chains in China, thus further boosting the increase in demand for frozen food. On the other hand, starting in the first quarter of 2024, pig prices rebounded steadily. According to Steel Union data, from May 23 to 30, 2024, the average price of pigs sold nationwide was 17.02 yuan/kg, up 1.23 yuan/kg from last week, 7.79% month-on-month, and 18.28% year-on-year. As pig prices stabilize, the pressure on the company to sell stuffed products such as dumplings is expected to gradually ease.
The company actively explores the B-side market and develops online business. By product, sales revenue of frozen noodle and rice products in 2023 was 5.829 billion yuan, -9.46%, accounting for 82.62%; sales revenue of quick-frozen prepared food was 1,076 billion yuan, +28.44% year-on-year, accounting for 11.27%.
By industry, retail market revenue in 2023 was 5.626 billion yuan, -9.58%, accounting for 79.73%; restaurant market revenue was 1,430 billion yuan, +17.93% year-on-year, accounting for 20.27%. In 2023, the company actively developed B-side channels, adjusted the restaurant chain's business strategy, and strengthened the service awareness of restaurant chain customers. The company's products such as brown sugar pickles, Chinese hamburger embryos, cheese fish sticks, and fennel fritters received unanimous praise from the restaurant chain customers, driving the rapid growth of restaurant revenue. At the same time, the company develops online business and lays out emerging business formats. The company introduced a team of professional e-commerce talents and set up its own live broadcast room. In 2023, the company's online main item, “raw dumplings,” sales exceeded 100 million. While the revenue scale increased rapidly, it also had the effect of brand promotion and empowerment.
The company's overall profit margin has been suppressed, and the restaurant side's profit level is impressive. In 2023, the company's comprehensive gross profit margin was 25.84%, -2.23pcts year on year; net profit margin was 10.62%, -0.16pcts year on year.
By industry, the gross profit of the retail side and the restaurant side in 2023 was 25.67%/24.76%, respectively, -3.+54.p0c2tsp/cts compared to -3.+54.p0c2tsp/cts. 2024Q1 gross profit margin 26.60%, -1.68pcts yoy; net profit margin 10.19%, y-1.59pcts yoy. Affected by the decline in consumption of terminal products, the company's profit margins are under pressure in the short term. Judging from the investment ratio, the company's operating efficiency increased year-on-year.
In 2023, the company's sales expense ratio/management expense ratio was 11.48%/2.30%, respectively, -0.4pcts/-0.63pcts year-on-year.
The first coverage gave the granting company an “added weight” rating. Considering the growth rate of the company's catering channel and the status of the retail business, it is estimated that in 2024/2025/2026, net profit attributable to mother will be 8.06/806/906 million yuan, EPS of 0.92/0.98/1.03 yuan, respectively, and the corresponding PE is 13.36/12.54/11.88 times. According to the average price-earnings ratio of comparable companies in the industry in 2024, the company has some room for valuation expansion, covering the investment rating given to the company “increase in wealth” for the first time.
Risk warning: Channel expansion falls short of expectations, rising raw material prices, food safety incidents, etc.