2Q24 net profit in line with market expectations

1H24's revenue was 3.021 billion yuan, about -5.8% year on year; net profit to mother was 0.29 billion yuan, about -0.6% year on year; net profit after deducting non-return to mother was 0.277 billion yuan, about -1.26% year on year. Among them, 2Q24's revenue was 1.621 billion yuan, about -6.3% year on year; net profit to mother was 0.175 billion yuan, up about 14.2% year on year; net profit after deducting non-return to mother was 0.168 billion yuan, up about 12% year on year. Net profit for 2Q24 was in line with market expectations.

Development trends

2Q24 revenue was under year-on-year pressure. The East China/Northwest/Southwest China market was relatively resilient, and revenue in the South China/Northeast China/North China market declined significantly. Revenue from the former dominant market in the north was relatively under pressure, and the western market was relatively stable. In 2Q24, revenue from Northeast China and North China was about -11.0%/-8.4% year on year, respectively, while revenue from Northwest/Southwest China was about -4.1%/-2.5% year on year, respectively. Potential market revenue all declined. In 2Q24, East China/Central China/South China market revenue was -3.1%/-4.0%/-18.0%, respectively.

2Q24 controlled return rates, improved operating efficiency and cost control, and 2Q24 raised the net interest rate to 10.8%.

The gross margin of 2Q24 reached 25.1%, +2.0ppt year over year. Among them, we estimate the return rate to be -1 percentage point year over year. In addition, the company controlled sales turnover and improved operating efficiency to improve gross margin. In addition, the 1H24 project under construction was relatively small, and the impact of depreciation was manageable. 2Q24 has strict controls on the cost side. Sales/management/R&D expense ratios were -0.4/-0.3/-0.1ppt, respectively, and the financial expense ratio was +0.2ppt year-on-year due to increased interest-bearing liabilities.

Looking ahead to 2H24: We expect that measures to increase cost control and enhance efficiency will continue, and 2H24 net profit is expected to maintain its upward trend. Considering the continued recovery of the consumption scenario and the impact of the early Spring Festival in 2025, we expect the 2H24 revenue side decline to narrow. The company experienced two consecutive quarters of decline in net profit margin in 4Q23-1Q24. 2Q24 began making business strategy adjustments, that is, to guarantee net profit margins through measures such as controlling costs+enhancing assessment of return rates, discounts+improving operational efficiency. We expect this strategy to continue in 2H24. The 1H24 interim dividend ratio reached 66%, continuing the high level of dividends and focusing on shareholder returns.

Profit forecasting and valuation

We expect that the business strategy for the second half of the year will be similar to the 2Q situation, which will increase the improvement of cost control and operational efficiency. Therefore, we raised our 2024 net profit 5.1% to 0.613 billion yuan, keeping the 2025 net profit forecast unchanged. The current stock price is trading at 15/14.4 times the 24/25 P/E; considering the profit forecast adjustment but the recent decline in sector valuation, we maintain our target price of 7.5 yuan, corresponding 19.6/18.8 times 24/25 P/E and 30% share price upward space, and maintain an outperforming industry rating.

risks

The recovery in demand fell short of expectations, competition among bakery categories intensified, and new production capacity required capital and increased demand for loans.