Three rounds of mergers and acquisitions have made it a leading regional dairy company, and the overall business situation is improving steadily. Based in the southwest, it has a national layout. Currently, it has 52 holding subsidiaries, 15 major dairy brands, 16 dairy processing plants, and 12 own ranches. Operating revenue/net profit to mother in 2023 was 10.987/0.431 billion yuan, up 9.80%/19.27% year on year. Mainly engaged in R&D, production and sales of dairy products such as liquid milk, dairy drinks, and milk powder, liquid milk revenue in 2023 reached 9.755 billion yuan, up 11.15% year on year, accounting for 88.79% of total revenue.

Dairy products: The competitive pattern is “two super strong”, and room temperature milk dominates consumption. 1) Market size: The market size of China's dairy industry is 387.593 billion yuan in 2023. The growth rate of the industry is slowing down, and it is expected to exceed 400 billion yuan in 2025. 2) Market pattern: Yili and Mengniu continue to lead, with industry CR2 reaching 58.5%.

3) Consumption structure: Milk consumption in 2023 was 159.015 billion yuan, with room temperature milk and low temperature fresh milk accounting for 74.48% and 25.52% respectively. Consumption of low-temperature milk is expected to increase further with the improvement of sterilization technology.

Low-temperature milk: Mainly high-end products. The unit sales price and gross margin are higher than room temperature milk, and there is still room for profit growth. The domestic pasteurized milk market reached 39.222 billion yuan in 2023, and the five-year CAGR was 7.52%. The market size showed a recovery trend, and there is still plenty of room for improvement in penetration. It is estimated that the market size may exceed 40 billion in 2024 and 50 billion in 2027. The competitive landscape is fragmented, with regional/regional dairy companies dominating the market. CR3 in 2020 was 39.60%.

With the “Fresh Strategy” as the core, it is expected to achieve a compound double-digit revenue growth rate in 2023-2027, and the five-year net interest rate will double. 1) Brand: In 2023, advertising expenses were 0.257 billion yuan, an increase of 66.59% over the previous year, to help strengthen our own brands while highlighting the characteristics of local brands. 2) Product: The three major matrices of low temperature fresh milk, low temperature yogurt, and room temperature milk are clear. Focusing on the high-end low-temperature milk market; 7 new organic products were added to the room temperature milk circuit, and room temperature organic products increased by more than 50% year-on-year throughout the year. 3) Market: The product structure of the Southwest market is relatively balanced. East China is dominated by low-temperature milk, while Northwest China, Central China, and North China are dominated by room-temperature milk and milk drinks. 4) Channel: The e-commerce channel performed well, with revenue of 0.88 billion yuan in 2023; the annual GMV of the “Fresh Go” shopping mall exceeded 0.27 billion yuan.

Investment highlights: 1) Medium- to long-term: There is huge room for increase in per capita consumption, the penetration rate of low-temperature milk continues to increase, strong product strength combined with brand synergy, and there is still room for growth in profitability. 2) Short-term: Raw milk prices have entered a downward cycle, and the subsidiary's performance growth performance is impressive. The main business revenue and profit of Piano Brand, Vipshop, and Shenlan all achieved double-digit growth in 2023.

Investment advice: The company's EPS is expected to be 0.66/0.79/0.96 yuan in 2024-2026, respectively. The current stock price corresponds to PE of 13X/11X/9X, which is covered for the first time and gives a “buy” rating.

Risk warning: Product promotion falls short of expectations; food safety risks; raw milk prices are rising rapidly