Predict 1H24 profit to increase year over year by high number of units
We expect the company's revenue to grow by a high number of units in the first half of the year, mainly driven by the good performance of tea and juice. We expect the company's net profit to increase by a high number of units year-on-year, mainly due to improvements in product structure to offset the adverse effects of packaged water, making net interest rates stable year on year; revenue performance is in line with expectations, and profit performance may slightly exceed market expectations, mainly due to improved product structure.
Key points of interest
The rapid growth of sugar-free tea is hedging the adverse effects of packaged water, and 1H24 revenue is expected to increase in high units. According to CICC supermarket data, sales revenue from modern channels of Nongfu Spring Tea Drink and Juice achieved good growth of 37% and 11% in January-May, which is better than the industry's 10% and 5% growth rate. We judge that it has mainly benefited from good travel and tourism since the beginning of the year to date, driving the recovery of the beverage consumption scene, and that unsweetened tea and juice maintained their growth potential under the company's strong product strength. According to our grassroots research, we expect the company's 1H24 revenue to increase by a high number of units. Among them, we expect packaged water to decline by a year over year, mainly due to the influence of public opinion in the first half of the year, while tea drinks are expected to continue to grow strongly by more than 50%. Against the backdrop of rapid growth in the sugar-free tea industry, Oriental leaf products and brand strength will continue to be recognized by consumers, and the company will continue to expand channels and launch new flavors, and increase market share; we expect 1H24 juice to achieve high double-digit growth, and functional drinks to achieve steady growth.
The profit margin for the first half of the year is expected to be stable year over year, exceeding market expectations. We expect 1H24's gross margin to drop slightly by 1-2 ppt year on year, mainly due to the decline in packaged water affecting the scale effect, the year-on-year increase in juice ingredients, and the year-on-year increase in promotion intensity. In terms of cost, considering that the share of tea with relatively low cost rates in the product structure continues to rise, we expect logistics rates to save or offset the increase in advertising costs, and the rate will decline year on year.
Overall, we expect 1H24 net interest rates to be stable year over year, and net profit will increase by a high number of units year over year.
Sales of packaged water are under pressure in the short term and may be repaired in the long term, and the competitiveness of the beverage industry continues to strengthen. The company launched a green bottle of pure water at the end of April this year. We believe that on the one hand, this initiative can accelerate consumer education on natural water and pure water, and on the other hand, it may help repair packaged water sales through flexible pricing strategies, while further expanding the packaged water market share. Our grassroots research shows that recent public opinion still has an impact on packaged water sales but is gradually declining. In terms of beverages, the company is committed to long-term brand building and category innovation in technology research and development. Currently, it is showing an important role in long-term strategic strength in the context where sugar-free tea is already popular. As the share of beverage revenue rises to more than 50%, we expect the company to have a solid foundation and adopt a more flexible pricing strategy to further expand its share advantage. Considering the company's strong comprehensive strength in the beverage industry, we think the company's long-term investment value is outstanding.
Profit forecasting and valuation
The company's stock price corresponds to 27x/25x P/E for 24/25. Considering the pressure on packaged water sales, the 24/25 profit forecast was lowered by 7%/10% to 12.8/14.1 billion yuan; at the same time, considering the declining market valuation, the target price was lowered by 18% to HK$45, corresponding 35.7/32.3 times the 24/25 P/E and 31% upward space to maintain the outperforming industry rating.
risks
Prices of raw materials fluctuated, new products fell short of expectations, and competition intensified.