Incidents:
On August 8, 2024, Zhongju Hi-Tech released the 2024 semi-annual report. 2024H1 achieved operating income of 2.618 billion yuan, -1.35% year on year; net profit due to mother 0.35 billion yuan, which was corrected year on year; net profit without return to mother was 0.339 billion yuan, +14.53% year over year. 2024Q2 achieved operating income of 1.134 billion yuan, -11.96% year on year; net profit due to mother 0.111 billion yuan, which was corrected year on year; net profit without return to mother was 0.103 billion yuan, -32.37% year on year.
Investment highlights:
External demand is weak, internal reforms are being adjusted, and 2024Q2 is under pressure in the short term. 2024Q2 Delicious Fresh achieved revenue of 1.095 billion yuan, -12% YoY. By category, soy sauce/chicken powder, cooking oil/other condiments achieved revenue of 6.11/0.146/0.114/0.129 billion yuan, respectively, or -22%/-15.4%/+29.1%/-30.9%. Sales in the company's main categories are under pressure. We believe that from the outside, it is mainly due to the slowdown in macro-demand recovery after the Spring Festival and the intensification of competition in the industry; from an internal perspective, the main reason is that the company's management level is still in the reform and adjustment period, channel sorting continues to advance, and it will still take time to get in touch with dealers. In response to the channel side, Q2 revenue from distribution channels, which accounts for more than 90%, fell 19.7% year on year to 0.966 billion yuan. Direct sales channels maintained a good growth rate, and Q2 revenue increased 23.3% year on year to 0.032 billion yuan. The company adheres to the nationalization strategy, accelerates the layout of the Midwest and North markets, and focuses on optimizing dealer quality in the East and South. The number of 2024H1 dealers in the East/ South/ Midwester/ North increased by a net of 8/18/94/81 to 406/345/675/859 respectively.
Gross margin continued to rise, and increased expenses dragged down net profit performance. 2024Q2's gross margin of +3.64pct reached 36.17% year-on-year, mainly benefiting from: 1) reduced raw material procurement costs; 2) product structure optimization; 3) improved production efficiency; 4) transportation costs per ton may decrease as the company's supply chain is optimized. On the cost side, the 2024Q2 sales expense ratio and management expense ratio were 14.83%/7.75%, respectively, compared to +6.43/+1.48pct, respectively. We believe that the main company is in the early stages of reform. A series of measures in channel adjustment, supply chain efficiency, informatization construction, organizational structure, etc. have been launched one after another, and the cost investment has been large. Subsequently, as the effects of the reform gradually become apparent, the accuracy of cost investment is expected to improve. Affected by the cost side, the company's Q2 net profit margin was 9.79%.
Short-term reforms are painful and are based on long-term development. Currently, condiments as a whole have entered the stock game stage, and demand is weak or poses a greater challenge to enterprises in the reform period. However, 2024 is the beginning of the company's management transformation and upgrading. The company actively practices internal skills and is reforming and reshaping all aspects of the organizational structure, channels, marketing, and supply chain under the power of the new management. We are currently in a painful period of reform. In the future, with the gradual streamlining of channels, products, cost management, etc., the dividends of the company's reform are expected to continue to be realized.
Profit forecast and investment rating: The company's long-term strategy is clear, the product-side structure continues to be optimized. In terms of channels, the C-side focuses on dealer empowerment and quality improvement to accelerate the development of weak markets; B-side demand is expected to continue to improve along with the recovery of the catering industry. With the gradual deepening of the reform plan, the company's development is expected to reach a new level. We expect the company to achieve operating income of 5.8/6.8/7.9 billion yuan in 2024-2026, respectively, +13%/18%/15% year-on-year; net profit to mother of 0.761/0.942/1.156 billion yuan, EPS of 0.97/1.20/1.48 yuan respectively, corresponding PE is 20/16/13 times, respectively, maintaining a “gain” rating.
Risk warning: 1) The internal reform process is uncertain; 2) rising raw material prices reduce profits; 3) sales fall short of expectations due to increased competition; 4) production capacity investment progress falls short of expectations; 5) the progress of the real estate business divestment falls short of expectations; 6) food safety risks.