1H24 results are in line with the forecast range

The company announced 1H24 results, with revenue +72% year-on-year to 0.846 billion yuan, and net profit to mother turned a year-on-year profit of 0.098 billion yuan. Among them, 2Q24 revenue reached 0.461 billion yuan, +38.1% year-on-year, and net profit to mother reached 0.056 billion yuan, turning a year-on-year loss into a profit, which is in line with the previous forecast range and our expectations.

Development trends

1. Jueyan drives the rapid growth of its own brands, and the repair of the low base of export OEM. We believe that the 1) sub-model: 1H24 achieved revenue of 0.157/0.689 billion yuan in domestic/overseas respectively, with rapid repair by overseas foundry, driving domestic independent brands to grow faster than the industry; 2) By product: 1H24 animal skin chew/plant chew/nutritious meat snacks/staple food and wet food, respectively, achieved revenue of 2.63/0.298/0.19/0.082 billion yuan, compared with +88%/+38%/+35% over the same period. The company's gluing business achieved rapid repairs.

2. Increased capacity utilization, relatively low raw material prices, rapid recovery of profitability. We believe that 1) gross profit side: 1H24 company's gross margin achieved 26% year over year, with domestic and overseas gross margins of 27.1%/23.2% respectively, and gross margins of animal skin chew/vegetable chew/nutritious meat snacks/staple food and wet food were +12/+8/+17/+3ppt to 22.8%/29%/29.9%/22.2%, respectively, mainly due to the increase in capacity utilization after the company's orders resumed. At the same time, raw material prices were reasonably low, and profitability recovered markedly; 2) Cost side: increased with revenue volume recovery. The company's expense ratio returned to normal, and the 1h24 sales/management/finance expense ratio was -2.8/-5.8/-1.2ppt to 6%/5.9%/-1.3% year-on-year. Under the combined influence, the company's 1H24 net interest rate reached 11.6%, +20.3ppt year on year.

3. Differentiated independent brands continue to be incubated, and production capacity for staple foods continues to be released. We believe that 1) Brand side: The company's Jueyan brand launched new products such as air-dried staple food, season-limited pet ice cream, and a freeze-dried series with differentiated ingredients at the Asian Pet Show. It continues to innovate in terms of process and ingredients to fill the needs of the segmented Blue Ocean racetrack and strengthen the brand image of high-end dog food, which is expected to drive the continuous rapid growth of its own brands; 2) Foundry side:

According to the General Administration of Customs, the domestic pet food export/export volume reached 0.961 billion yuan/0.0296 million tons in July '24, +20%/+23.4%. We expect the company has sufficient orders in hand and the export business is expected to grow steadily; 3) Capacity side: In terms of snacks, the company's Vietnamese factory achieved high profitability and full production, and the Cambodian factory climbed smoothly, and is expected to gradually contribute to profit starting in '24. In terms of staple foods, the company's high quality pet dry food production line with an annual output of 0.04 million tons in New Zealand relies on OEM to continue climbing in the short term, and is expected to support the formation of independent brands of high-end staple foods in the medium to long term; the new domestic pet food project with an annual output of 0.05 million tons is expected to continue to tap into segmented demand in the staple food sector.

Profit forecasting and valuation

We keep our profit forecast unchanged. The current stock price corresponds to 19/17 times P/E for 24/25, respectively. Keep the outperforming industry rating and target price of 17 yuan unchanged, corresponding to 26/24 times P/E in 24/25, respectively, and have 40% room to rise compared to the current stock price.

risks

Raw material prices fluctuate, trade friction risks, exchange rate fluctuations, and production capacity releases fall short of expectations.