Matters:
The company issued a pre-profit announcement for the semi-annual results of 2024. It is expected to achieve operating income of about 2.62 billion yuan in the first half of the year, a year-on-year decrease of 1.29%, and net profit to mother of about 0.315 billion to 0.378 billion yuan, after deducting non-return net profit of 0.306 billion to 0.368 billion yuan, a year-on-year increase of 3.37% to 24.30%. Both revenue and profit fell short of previous expectations.
Commentary:
Under pressure from external demand and internal channel reform, the company's Q2 revenue is expected to be -11.8% year over year. According to the company's announcement, Q2 is expected to achieve revenue of 1.135 billion, -11.8% year on year, lower than previous expectations. First, channel inventory is expected to accumulate under active delivery in the first quarter. Second, torrential rain was frequent in the main sales regions of companies such as South China and East China during the period, and external demand for catering and other terminals was weak. Third, the company focused on channel reform in Q2. Reform measures were implemented in April, and cost adjustments were promoted in May. There were run-in and adjustment pains. Some dealers remained on the sidelines for a short period of time due to high pressure on their own operations. At the same time, the cancellation of cooking oil and some long-term products also had a drag on revenue. Furthermore, the June Shenzhen-China Railway land collection and storage revenue was not confirmed during the period, and it is expected that it may be reflected in the second half of the year.
Profit margins declined year-on-year in Q2 due to increased expenditure and reduced scale effects. The company's profit turned sharply into profit in the first half of the year, mainly due to the estimated debt of 1.747 billion yuan last year due to the impact of contract disputes.
Looking at Q2 alone, the company is expected to achieve profit of 0.076-0.139 billion, corresponding to a net profit margin of 6.7% to 12.2%, a decrease from month to month, while net profit without return to mother is expected to be in the 0.069-0.131 billion range, down 13.6% to 54.3% year on year. If we take the median value and expect the Q2 profit margin to drop by 3 pcts, it is speculated that the reason is, on the one hand, that the company increased its sales expenses, advertising and marketing expenses, etc., and on the other hand, it is due to a sharp decline in revenue and a weakening of the scale effect. Furthermore, the increase in incentive expenses this year is also expected to have an impact.
Reforms are not easy in a contrarian environment, but the company's driving force for change from the top down will still be the core ballast stone of operations.
We proposed in our previous report that “reforms are not achieved overnight; corrections and adjustments in the middle details are unavoidable. Furthermore, we should grasp the pace of reform, maintain patience and confidence, and gradually accelerate step by step.” The general direction of the company's reform still revolves around three stages of internal reform, marketing strength, and merger and acquisition collaboration. The current problem is that external demand is unfavorable, and it is more difficult to quickly stimulate sales and dealer enthusiasm through aggressive channel strategies. However, we believe that under the company's internal demands for firm change, the main direction of reform has not changed. The next priority is first to stabilize internal team confidence and give stable expectations for target assessment and incentive acquisition. The second is to stabilize the channel order. The third is to speed up the creation of a model market and reshaping the model market. Market confidence, and finally, channel investment drives revenue acceleration. Considering that the H2 base is low and there is less pressure, we expect the company to improve its reform ideas, enter a better pace and state of reform in the second half of the year, and save more strength to accelerate growth in the coming year.
Investment advice: Performance falls short of expectations, strong motivation to seek change, and maintain a “strong” rating. Despite fluctuations in short-term reports, it is also possible to observe that changes within the company have actually occurred. Currently, land collection and storage have progressed. More importantly, there is strong internal momentum for change. We expect that in the future, as the company summarizes experiences and optimizes strategies, the operation is expected to gradually progress and move into an upward improvement channel. Considering the land expropriation contribution, the compensation for the Shenzhen-China Railway (about 53 acres, contributing nearly 0.3 billion in revenue) is included in the 24-year report, and compensation for sandwich land, etc. (169 acres, considering that the compensation standards for the two land expropriations are consistent in principle, estimated contribution revenue of about 0.94 billion yuan based on area) is spread evenly from the end of October '24 to the end of October '25, while not considering any land contributions or mergers and acquisitions for 26 years. We adjusted the 24-26 EPS forecast to 1.36/2.03/1.48 yuan (the original forecast was 1.04/1.24/1.65 yuan), corresponding to 15/10/13 times the P/E valuation. After deducting land compensation, the estimated revenue for 24/25 would be 5.36/6.31 billion, respectively, and 0.7/0.9 billion in net profit, respectively, giving 25 times PE over 25 years, and adding a real estate valuation of about 2 billion yuan to adjust the target market value/target price of about 24.5 billion/31.35 yuan to maintain the “strong” rating.
Risk warning: Downstream demand is sluggish; market competition is intensifying; initial cost investment in the early stages of reform; nationalization expansion, catering channel development, etc. fall short of expectations; progress in the divestment of non-main businesses falls short of expectations; food safety issues, etc.