Key points of investment:

Incident: The company released its 2024 mid-year report. 24H1 achieved operating income of 1.18 billion yuan, a year-on-year increase of 0.8%, and net profit to mother of -0.03 billion, a year-on-year reduction in losses, after deducting non-return net profit of -0.04 billion yuan. It is estimated that in a single quarter of 24Q2, the company achieved operating income of 0.45 billion yuan, a year-on-year decrease of 7.5%, net profit to mother of 0.055 billion, a slight increase in year-on-year losses. After deducting net profit not to mother of 0.063 billion yuan, the year-on-year loss was reduced. The revenue and profit were in line with the previously issued performance pre-loss announcement.

Investment rating and valuation: Considering the weak recovery in demand, the profit forecast was slightly lowered to forecast net profit to be 0.33 billion, 0.41 billion, and 0.48 billion (0.35 billion, 0.45 billion, 0.54 billion) respectively in 2024-26, with year-on-year increases of 17%, 24%, and 18%, respectively. The latest closing price corresponding to 2024-26 PE was 14x, 11x, and 9x, respectively, maintaining an increase rating. In the medium to long term, driven by channel decline and product upgrades, the company's brewing business revenue and cash flow are expected to maintain steady growth; through differentiated positioning and the construction of terminal outlets in the first and second tier markets, the company's ready-to-drink business is expected to rapidly increase in scale and drastically reduce losses, and can iron out its own seasonal characteristics, thus achieving two-wheel drive for brewing and ready-to-drink.

24Q2 ready-to-drink product strategy adjustments. According to the 24-year report, by category, 24Q2 brewing and instant drinking achieved revenue of 0.13 billion and 0.31 billion, respectively, compared with -23% and -0.4%, respectively. Among them, 1) brewing revenue declined, mainly due to inventory removal in the same period last year, 2) ready-to-drink revenue performance was lower than expected. Among them, a) meco juice tea is expected to achieve relatively rapid revenue growth, mainly due to differentiated product positioning and years of cultivation, and b) the revenue performance of frozen lemon tea is expected to be under pressure this year. The base is high, and positioning and selling points were adjusted before the peak season. c) The company actively reduced sales of Dahongpao milk tea. Looking ahead to 24H2, the company's product positioning has been adjusted, and it continues to be frozen and built by putting in its own freezers and purchasing ice channel resources. It is recommended to focus on the month-on-month performance of the company's ready-to-drink business in the third quarter.

24Q2 gross margin increased year over year. According to the 24-year report, the 24Q2 company's gross profit margin was 25.7%, +2.1pct. It is expected that cost pressure will continue to decline and production efficiency will improve due mainly to technical reforms. 24Q2 sales, management, R&D, and finance cost rates were 35.6%, 11.9%, 2.5%, and -5.3%, respectively, -1.7 pct, +1.2 pct, +0.7 pct, and -1.0 pct, respectively. In addition, the share of other income as a share of revenue fell 3.3 pct year over year, mainly due to a decrease in government subsidies. Overall, the company's 24Q2 net profit margin was -12%, -1.9 pct year on year; net profit margin after deduction of non-return to mother was -13.8%, up 1.1 pct year on year.

The catalyst for stock price performance: sales volume of ready-to-drink products, loss reduction in ready-to-drink business, and recovery of brewing business exceeding expectations? Core hypothetical risks: ready-to-drink business performance falls short of expectations, rising raw material prices, food safety risks