Incident: Company discloses full-year results for FY2023. For the full year of fiscal year 2023, the company achieved revenue of 23.586 billion yuan (YOY +2.9%) and realized net profit of 3,990 billion yuan (YOY +18.4%). In addition, the company plans to pay a cash dividend of 2,776 billion yuan (corresponding dividend payment rate of 69.57%).

Revenue growth was steady, and gross margin improved significantly, driving excellent net profit performance. On the revenue side, FY2023 was mainly affected by the growth in dairy & beverage sales, and the company's revenue increased 2.87% year over year. Due to the impact of falling prices of some bulk raw materials and packaging materials and optimization of production and employment strategies, gross margin increased by 2.67 pct to 46.60% year on year, so gross profit increased 9.13% year on year; on the cost side, the company's expenses ratio increased 0.73 pct year on year (mainly due to management expense ratio +0.48 pct year on year, financial cost ratio +0.61 pct year on year). Furthermore, the income tax rate decreased by 3.3 pct to 26.3% compared with the same period. As a result, the net profit margin to mother increased by 2.21 pct year on year, corresponding net profit to mother increased by 18.36% year on year.

Dairy drinks and rice crackers from overseas & emerging channels performed well, and candy recorded a new high annual revenue. For the full year of fiscal year 2023, looking at the performance by category: (1) The company's revenue in the dairy and beverage category increased 7.4% year-on-year.

Revenue from the Wangzai milk and beverage categories achieved high single digit and medium to high digit growth respectively. The company continues to strengthen product management, consolidate business operations, and enhance the coverage of terminal stores. At the same time, with regard to the annual expansion of outlets such as restaurants, breakfast restaurants, and gas stations through the special channel, the sales volume of canned milk in FY2023 increased by double digits over the same period last year. On the profitability side, the unit consumption cost of packaging materials such as tin sheets and raw paper fell by double digits year on year. Furthermore, the year-on-year decline in the unit consumption cost of milk powder increased to double digits in the second half of the fiscal year, so this business achieved a gross profit margin of 48.5% (+3.7 pct year over year).

(2) Revenue from the rice crackers category increased 2.3% year on year. Thanks to channel diversification strategies, revenue from rice crackers in overseas markets and emerging channels (accounting for about 20% and 10% of the revenue of the rice crackers category, respectively) maintained double-digit growth compared to the same period last year. Furthermore, the customized gift package met the differentiated needs of customers, and revenue for FY2023 exceeded 40 million yuan. On the profitability side, benefiting from the double-digit reduction in the unit consumption cost of palm oil compared to the same period in '22, the continuous optimization of labor costs, and in line with the optimization of production layout, this business achieved a gross profit margin of 46.0% (+3.4 pct year over year).

(3) Earnings in the snack food category declined by 5.5% year on year. Earnings in the main ice products category declined over the same period due to factors such as the pace of operation, but earnings for the natural year (January-December) were in single digits compared to the year-on-year increase in '22. Revenue in the candy category was a single digit higher than the same period in FY22, hitting a record high in the category's historical revenue in 2023. On the profitability side, the share of high-margin candy and diversified new product sales increased. Furthermore, unit consumption costs for raw paper, plastic film, and plastic particles decreased compared to the same period last year, offsetting the impact of rising costs of sugar, gelatin, etc., so the gross margin of this business reached 44.0% (+0.6 pct year over year).

The recovery of traditional channels, and the good performance of emerging channels & overseas markets are important drivers of growth. By channel, (1) Revenue from traditional channels resumed growth in fiscal year 2023 compared to the same period last year. Among them, the milk category grew by a single digit and the beverage category grew by double digits. The company is deeply involved in the terminal market to make up for gaps in outlets. (2) Hyundai Channel's revenue growth for fiscal year 2023 was low to mid-single digits compared to the same period last year. Among them, dairy products and beverages grew significantly. (3) Revenue from emerging channels has maintained high single-digit growth, becoming an important driving force for the Group's revenue growth and medium- to long-term development strategy. Among them, the vending machine channel achieved a double-digit increase in channel revenue over the same period due to the expansion of sales opportunities for rice crackers and casual snacks due to the new smart cabinet. In addition, benefiting from the company's production capacity and production capacity advantages in various categories such as dairy products, beverages, baby products, rice crackers, and candy, OEM channel revenue grew rapidly year-on-year in FY2023. (4) Overseas earnings achieved medium to high double-digit growth. Among them, earnings growth rates in Asia, America and Oceania were remarkable, and candy products made significant progress in developing overseas markets.

We look forward to continuing the positive trend in the 2024 fiscal year. Looking ahead to the next fiscal year, on the one hand, gross margin of dairy products and beverages is expected to improve further, benefiting from the year-on-year decline in the average cost of milk powder inventory procurement and the adjustment of the tariff policy on imported milk powder. On the other hand, the company will continue to improve diversified procurement strategies and refined inventory management, develop sales channel network layout, continue to launch competitive and differentiated new products, and improve product specifications and product price bands. We expect the company's sales performance to continue to be stable and positive in the next fiscal year.

Profit forecasting and investment advice. We expect the company's total revenue for the 2024-2026 fiscal year to be 249.92/259.26/26.837 billion yuan, respectively, main operating income of 246.54/255.88/26.499 billion yuan, and net profit to mother of 45.54/48.78/5.210 billion yuan respectively, and corresponding EPS of 0.39/0.41/0.44 yuan/share, respectively. We believe that, with reference to comparable companies' PE valuations, we have given the company a PE (2024E) valuation range of 16-20 times, corresponding to a value range of 6.24-7.80 yuan/share, based on the Hong Kong dollar to RMB 0.90 exchange rate, corresponding to a reasonable value range of 6.93-8.67 HKD/share, and continue to give a “superior to the market” rating.

Risk warning. (1) Food safety risks, (2) increased market competition, (3) new products, new channels, and new market expansion fell short of expectations, and (4) upstream raw material costs fluctuated greatly.