Guangfa Securities released a research report, stating that since 2022, the weak EPS expectation of the ROE numerator has led the market to pay more attention to the denominator - high dividend yield. After demand in China recovers and EPS expectations are adjusted, the market style is expected to return to a sustained high ROE, and the value of leading companies in the food and beverage sector is expected to be highlighted.

Key Points: The company's performance declined due to the impact of orders from US customers. According to the company's 23-year annual report, the company achieved a revenue of 471 million yuan (YOY-1.31%); net income attributable to the parent company was 146 million yuan (YOY-20.19%), and the 23-year performance decline was mainly due to (1) The company's endoscope body shipments increased significantly, and the actual launch time of the new system for US customers was postponed compared to the original plan, affecting the company's shipment volume; (2) The company implemented stock-based incentives in 23 years, resulting in an increase in share-based payment expenses; gross margin was 63.72% (YOY-0.63pp). According to Wind, the company achieved a revenue of 118 million yuan in 24Q1 (YOY-20.74%), net income attributable to the parent company was 38 million yuan (YOY-20.68%), and the decline in performance was mainly due to the scale of lens body shipments in 23Q1, which doubled compared to previous years, and the high base period had an impact on this period's performance.

New cycle for food and beverage: contracting operation, returning to PB-ROE framework. (1) At the macro level: the economy is moving towards high-quality development, and demand is expected to recover. According to Guangfa Macro, short-term total demand will be insufficient after 2023, and the long-term actual GDP growth center is around 5%. (2) At the industry level: China's food and beverage industry is shifting towards reduced prices and increased volume, with the baijiu industry experiencing steady production and long-term prices synchronized (with PPI) after 3 years of clearing. The mass market is similar to the situation in the United States during the 1980s and in Japan during the 1990s, moving towards reduced prices and increased volume. Against the backdrop of reduced volume and increased price, the food and beverage industry is contracting operationally - deleveraging, reducing capacity, reducing fundraising, and continuing to increase free cash flow. (3) In the new cycle of food and beverage, the market is expected to return to the PB-ROE framework. Since 2022, the weak EPS expectation of the ROE numerator has led the market to pay more attention to the denominator - high dividend yield. After demand in China recovers and EPS expectations are adjusted, the market style is expected to return to a sustained high ROE, and the value of leading companies in the food and beverage sector is expected to be highlighted.

Free cash flow: Value mining of food and beverage under low growth. (1) The business model of the food and beverage industry is excellent, and its long-term free cash flow creation ability is strong. (2) High free cash flow has the potential to turn into high dividends. The dividend yield of head companies is already above 5%. (3) Improvements in free cash flow under the background of slow growth will lead to more companies with high dividends. On one hand, companies contract operationally in tune with the situation, improving free cash flow and providing space for dividends. On the other hand, under the backdrop of long-term decline in net profit growth rate, companies need to increase dividend payout ratio to maintain the ROE level. (4) According to the PB-ROE model, our dividend discount is applied to the leading companies, and we find that the ROE and dividend payout ratio have the potential to increase. Combining with overseas industry PB-ROE levels, we determined that part of the companies' PB valuations have been undervalued.

Buyback or dividend: ROE improvement promotes long-term bullishness of stock price. (1) Market review: looking at domestic and overseas markets, the market is in a brief bearish phase, dividend assets' stock prices have excess returns. (2) The inflection point for dividend payout ratio is the inflection point for ROE and stock prices. Taking China Yangtze Power as an example, the timing of its two fixed equity increases coincides with the time of dividend payout ratio increase; after the company's capital increase, in order to increase market cap, the dividend payout ratio increased from around 50% to 70%+, and the improvement of ROE promoted long-term bullishness of stock prices. (3) The advantage of dividends is that they provide long-term cash flow. Share buybacks have better long-term stock price performance. The dividend tax rate in A shares is relatively low compared to overseas markets, making cash dividends more popular, with buyback ratio being less than 8%. In overseas markets, the buyback model of the US stock market is mature, and the buyback size has surpassed dividends. The contribution of buyback to stock price is twofold. On one hand, it directly reduces the total share capital and contributes significantly to the stock price in the long term. For example, Apple's stock price has increased by 12.8 times in ten years, among which the reduction of share capital has contributed 1.9 times. On the other hand, it reflects an increase in valuation level after circulating stocks have shrunk, and the proportion of buybacks to floating stock is positively related to the PE valuation.

Investment advice: The food and beverage industry has gone through a 3-year adjustment period, and the valuation of mass-market products is close to the lowest level in twenty years, and the bubble in the baijiu industry is gradually clearing. From the perspective of cash flow analysis, leading white-horse companies have the potential to increase their dividend payout ratios. Compared with overseas essential consumer goods targets with the same ROE levels, the PB valuations of some companies have been undervalued. Based on the fundamentals, the core recommendations are Kweichow Moutai (600519.SH), Wuliangye Yibin (000858.SZ), Luzhou Laojiao (000568.SZ), Shanxi Xinghuacun Fen Wine Factory (600809.SH), and Mengniu Dairy (02319); from the growth perspective, some companies still have opportunities to improve their ROE as the demand side improves, and the core recommendations are Beijing Yanjing Brewery (000729.SZ), Qianhe Condiment and Food (603027.SH), Qiandao Yancu (001215.SZ), and Dongpeng Beverage (605499.SH).

Risk warning: macroeconomic performance is worse than expected, raw material costs rise, food safety issues, and related calculations have limitations.