1H24's core net profit is predicted to be 1.85 billion yuan, an increase of about 19% year-on-year

We anticipate a slight year-on-year increase in the company's 1H24 revenue, with a slight increase in the number of units of beverages and a slight decline in instant noodles. We expect the company's core net profit to increase by about 19% year on year, slightly better than market expectations. The increase in gross margin was better than expected, mainly due to the company's reduced promotions and price increases.

Key points of interest

1H24 revenue was affected by a high base, and overall performance was steady. According to CICC supermarket data, the 1H24 soft drink sector continued the 2023 consumer trend and maintained good sales, better than the overall consumer industry, especially tea drinks, packaged water and juice drinks performed better; from January to May 2024, supermarket channel sales of tea drinks/packaged water/juice drinks were +10.1%/+7.9%/+4.9%. Our grassroots research shows that under the influence of the high base of 1H23 beverages during the same period (+9.5% for 1H23 beverages), the performance was low year-on-year, and the performance was steady. We expect tea drinks to be the main driving force for growth. Carbonated drinks and juice may face high base pressure, and the overall beverage business performance will weaken in May-June or due to weather. We expect the company's 1H24 instant noodle revenue to decline slightly year-on-year, mainly driven by last year's high base (1H23 noodles +3% YoY); due to price increases and stocking, we expect 2Q24 noodle sales growth to improve month-on-month compared to 1Q24.

Reduced promotions and price increases led to the expansion of 1H24 gross margin, and 1H24 is expected to achieve better growth after deducting non-profits. We expect 1H24's gross margin to increase by 1-2 ppt year-on-year, mainly benefiting from reduced promotion of instant noodles and price increases for 1L drinks. The gross margin increase in the first half of the year may be better than that of beverages. In terms of expenses, we expect the increase in the company's expenses to drive a slight increase in the sales expenses ratio over the same period last year. Combining the above factors, we expect 1H24's net profit after deducting a double-digit year-on-year increase. Among them, since 1H23 includes one-time after-tax revenue of 0.085 billion yuan, we expect the net profit of the 1H24 statement to achieve a double-digit year-on-year increase.

The beverage boom is expected to continue in the second half of the year, and the trend of improving profit margins will not change. We expect the 2H24 beverage business to benefit from factors such as travel, outdoor activities, and hot summer weather. The company will actively promote beverage innovation and launch “Master Kong Sugar-free Oolong Tea” and the high-end sugar-free tea “The Successor of Tea” one after another this year. We expect that the good growth of tea drinks will drive steady growth in overall beverages. Our grassroots research shows that the factory price of Master Kong's instant noodles began to be proposed in early July. The price increase is about a single digit. We expect that the price increase may have some impact on sales in the short term, but in the long run, it is expected to lead to an improvement in the competitive landscape of the industry and help the company achieve its goal of increasing long-term profit margins. Considering the cost-side sugar price, the 2H24 corrugated paper price is expected to fall year over year, and the price increase, we expect 2H24 gross margin to continue to rise, and the net profit deduction for non-profit is expected to continue to achieve good growth in the second half of the year. The company is gradually focusing on increasing profit margins. We believe that if the industry pattern improves, it may be beneficial to Master Kong's medium- to long-term profit margin increase.

Profit forecasting and valuation

The profit forecast for 24/25 remains unchanged, after deducting +20.6%/7.5% of the non-profit ratio. The current transaction is 15/14 times the 24/25 P/E; considering the upward market valuation, the target price was raised 14% to HK$12, corresponding 18.0/16.7 times the 24/25 P/E and 20% upward space, maintaining the outperforming industry rating.

risks

Demand recovery fell short of expectations, and raw material prices fluctuated.