Matters:

The company released its 2024 semi-annual report. In the first half of the year, the company achieved revenue of 0.89 billion, +4.9% year on year; net profit to mother was 0.06 billion, +6.1% year over year. The Q2 Company achieved revenue of 0.43 billion, +1.7% YoY; realized net profit of 0.02 billion yuan, or -3.4% YoY.

Commentary:

Big B's pressure continues, competition from Little B intensifies, and Q2 revenue falls short of expectations. 24H1's revenue was +4.9%. By product, the 24H1 bakery category was -8.3% year over year. It is expected that the share of products such as egg tarts will decrease, and the deep-fried category is -4.3% year over year. Mainly, the growth rate of Yum Sheng fritters is slowing down, sesame balls are gradually maturing, and competition for other single products is limited and competition intensifies. Cooking/cooking categories and others were +32.4%/+19.0% year over year. Among them, cooking benefited from the rapid introduction of pictogram packages in the group meal market, while the cooking category mainly contributed to the increase in B-side customized prepared dishes.

By channel, the number of 24H1 dealers decreased by 118 to 1,423, corresponding to distribution revenue of +1.8%. At the same time, the company focused on increasing development efforts for direct waist customers in the first half of the year. As of 24H1, the number of major customers was 178, +21.1% year over year, and direct channel 24H1 revenue was +8.5%. Among them, Baisheng fell 12.6% and Wallace fell 6.6%. Driven by the amount of prepared dishes, Haidilao more than doubled its growth. Looking at Q2 alone, the company's revenue was +1.7% year over month, further slowing down compared to Q1. On the one hand, small B-side competition intensified, market pressure increased, and growth slowed month-on-month; on the other hand, Big B continued to be under pressure under high base.

Gross margin improved, management expenses increased slightly, and Q2 companies' deducted non-profit margin slightly increased. The 24Q2 company achieved a gross margin of 25.0%, +2.4 pcts compared to the previous year. The main one was the decline in raw materials such as oil and fat, which led to a recovery in gross margin of deep-fried products. The second was the optimization of the distribution side product structure and the increase in the share of cooking products with high gross margin. On the cost side, the sales expense ratio for a single Q2 was +0.4 pcts year over year, and the management cost ratio was 10.5%, +1.7 pcts year over year. It is expected to be mainly an increase in personnel remuneration. Looking at actual splitting, 24H1 employee remuneration as a share of revenue increased 0.9 pcts year over year, and the R&D/finance cost ratio was +0.2/-0.3 pcts year over year, respectively. In the end, the company's net interest rate for Q2 was 5.8%, -0.3 pcts year on year. Considering the significant reduction in government subsidies in the current period, if this part of the impact is excluded, the company's net interest rate for Q2 deducted from mother is still 5.8%, but +0.3 pcts year over year.

Short-term fundamentals are still under pressure. The company actively adjusts and focuses on new products & new customers. Under short-term pressure, the company is also actively seeking change. The small B side is making extensive efforts to create new products and lay out multigrain egg cakes, golden chips, etc., focusing on improving dealer channel construction efforts, including increasing the number of market personnel, boosting product promotion and sales, supporting dealer development and growth, and at the same time increasing investment to drive sales. The big B side is boosting large customers and exploring new volume as much as possible. Looking ahead to the second half of the year, despite the loss of Big B's stock order share, the high base for the same period last year, and a high level of internal market volume, considering the first is the cultivation of new products, 11 new product series sold over 10 million in FY2023, which are expected to contribute to growth after entering the peak season. Second, the H1 volume of some big B has accelerated. H1, such as Haidilao and Tustin, performed well. The H2 momentum is expected to continue. Three, the 100 wins gap is expected to be filled. Yum has launched the “20th anniversary of egg tarts” in June. Recovery, the company's gap is expected to be partially filled, and we expect despite the overall improvement The extent may be relatively limited, but with the company's active adjustments, operations are expected to gradually recover in the second half of the year.

Investment advice: Operating pressure continues, and the company actively adjusts and gives a “recommended” rating. Short-term fundamental pressure is still there. With the weakening of the base, the company's active adjustments, and the release of new customers and new single products, the company's subsequent operations are expected to recover. In the long run, the company's products, from staple foods, rice and noodles to snacks and dishes, the growth path of channels from distribution and wholesale to various catering scenarios remains unchanged. Based on the company's semi-annual report, we adjusted the 24-26 EPS forecast to 1.45/1.67/1.93 yuan (the original forecast was 1.61/2.04/2.57 yuan), the corresponding PE was 16/14/12 times, and the target price was 29 yuan, corresponding to 20 times PE in 24 years, maintaining the “recommended” rating.

Risk warning: sluggish downstream demand; increased market competition; increased cost investment; food safety issues, etc.