Net profit for FY2023 was higher than our expectations

The company announced FY's 2023 results: revenue of 23.59 billion yuan, +2.9% year on year, net profit to mother of 3.99 billion yuan, +18.4% year on year; of these, 2HFY23 revenue was 12.31 billion yuan, +1.8% year on year, and net profit to mother was 2.26 billion yuan, +27.2% year over year. The net profit performance was better than our expectations, mainly due to lower costs, and the increase in gross margin was better than expected.

Development trends

Revenue continued to grow steadily in the second half of the fiscal year, and milk drinks performed well. The company's 2HFY23 revenue was +1.8% year-on-year, and rice/dairy drinks/leisure +1.2%/7.8%/-9.9%. Against the backdrop of weak overall demand for dairy products in FY23, Wangzai Milk achieved high single-digit growth, benefiting from the company's increased marketing for testing, festivals, etc., and the expansion of catering and special channels, and showed steady performance; the expansion of overseas channels and emerging channels in the rice crackers business achieved remarkable results, all achieving double-digit growth, driving steady growth in the rice fruit category; candy in snack foods achieved a record high, mainly benefiting from the expansion of overseas and emerging channels, while ice products were driven down by factors such as the pace of delivery. Overall, the company's 2HFY23 revenue performance was relatively stable. Among them, the stability of large single products such as Wangzai milk and rice crackers has been continuously verified.

Profit margins improved significantly in the second half of the fiscal year, and profit performance exceeded expectations. Benefiting from the decline in the prices of imported raw materials such as full-fat powder, tin, and raw paper, 2HFY23's gross margin improved by 2.9ppt year-on-year, with a gross margin of +1.8/+5.5/+0.5ppt for rice crackers, dairy drinks, and leisure. With strong cost control capabilities, the company's sales expense ratio remained stable. Combined with the tax rate returning to a normalized level in the second half of FY23, the company's 2hFY23 net interest rate of +3.7ppt reached 18.3% year-on-year, corresponding profit of +27.2%, which was better than expected.

Revenue for FY24 is expected to remain steady, and profit margins will continue to increase with strong certainty. According to our grassroots research, the company performed steadily in April-May in an environment where demand for rice crackers and milk drinks was weak. Ice products are still declining due to high channel inventories. Overall, we expect the company to maintain steady growth in FY24. On the one hand, thanks to the continuous expansion of overseas and emerging channels, on the other hand, the company focuses on scenario marketing, which is expected to grasp the characteristics of current consumption concentrated on peak seasons such as festivals. On the profit side, considering the main raw material, imported whole fat powder, has now been locked in low price inventory for the next 6-9 months, and sugar prices are expected to decline year on year from July. We expect the upward trend in gross margin and net profit margin to continue throughout the year 24, and the company is expected to achieve good profit growth in FY24.

Profit forecasting and valuation

The company traded 10.6/10.2 times 2024/25 P/E. Taking into account the favorable cost reduction, the profit forecast for the 24/25 fiscal year was raised by 8.9%/7.5% to $44.62 billion; the target price was maintained at HK$5.8, corresponding to 14.0/13.4 times the 24/25 P/E and 31.5% upside. The board of directors of the company recommended that FY pay 2.79 billion yuan in dividends in 2023, adding up to a total share repurchase of about $3.08 billion (77% of net profit). We estimate that the shareholder return on the company's dividends and repurchases is about 7%, and the dividend income is attractive. Maintain outperforming industry ratings.

risks

Demand is weak, competition is intensifying, and raw material prices have risen sharply.