Matters:
The company released its 2024 mid-year report, and achieved main revenue of 22.17 billion yuan in 24H1, an increase of 8.4%; net profit to mother was 6.24 billion yuan, an increase of 8.0%.
Commentary:
The public opinion incident put pressure on the performance of packaged water, which meant drinking tea maintained a 60% high growth rate. 24H1 packaged water achieved revenue of 8.53 billion, or -18.3% year over year. Sales declined mainly due to disturbances in public opinion at the end of February (in fact, packaged water increased 19% year on year in January-January). In the beverage business, 24H1 revenue was 13.64 billion yuan, +36.1% year-on-year. By category, revenue for ready-to-drink tea/ energy drinks/juice/ other beverages was 84.3/2.55/2.11/0.55 billion yuan, respectively, +59.5%/+3.8%/+25.4%/-7.2% compared with the same period last year. Ready-to-drink tea maintained a high growth rate. Among them, Oriental leaves continued to take the lead under strategies such as continuing to enrich the 900ml matrix, and tea pi also maintained a high increase. Among fruit juices, the Farmer's Orchard upgrade is back in line with the health trend, and the new blood orange flavor is water-soluble in C to jointly promote the growth of the variety. Energy drinks have maintained steady growth through new flavors and marketing interactions, while other beverages have declined as product focus strategies continue to advance.
Increased competition for packaged water is putting pressure on gross margins, but net interest rates remained stable after rate optimization and hedging. The gross margin of 24h1 Company was -1.38 pcts year-on-year to 58.8%, mainly due to the decline in packaged water revenue affecting scale effects, the promotion of pure green bottles on the water market, and the increase in the cost of raw materials for juice. The sales expense ratio was 22.4%, or 0.5 pcts year over year. Among them, the company increased advertising and promotion expenses to cope with market changes and maintain brand image, while benefiting from changes in product structure brought about by the increase in the share of beverages, logistics costs were reduced. The management fee rate was -0.6 pcts to 4.1% year on year, and management efficiency increased steadily. Looking at segmented profit levels, 24H1 packaged water/ready-to-drink tea/energy drinks/juice operating profit margins were -4.2/+1.0/ -5.9pcts year-on-year, respectively. Overall, the 24H1 net interest rate was 28.1%, which was basically the same as the previous year.
Packaged water sticks to share and actively respond, and the ability of beverages to promote new products is continuously verified, and short-term pressure cannot hide long-term value.
Faced with pressure from public opinion on packaged water to disrupt operations, the company responded quickly, actively clarified and responded to disputes, and maintained brand reputation. Second, it launched a green bottle of purified water and matched promotions. While stabilizing its share in the short term, it also has a broader pure water market from a long-term perspective. Currently, the influence of public opinion is gradually easing, and the company's share of packaged water has already rebounded from the previous period. In terms of beverages, although players from all walks of life have made efforts on the sugar-free tea circuit, Oriental Leaf products are outstanding, and the brand mentality has remained impressive since this year; the juice category as a whole has entered a period of maturity or even decline, the company's farmers' orchard products have been upgraded and the brand has been renewed, and water-soluble C expands the rich flavor matrix of blood oranges. The first half of the year ushered in a 25% contrarian increase, and the ability to promote new products continues to be verified.
We believe that short-term green water will replace red water with strong concessions and promotions, and the pressure may continue for some time to come; however, from a medium- to long-term perspective, farmers follow a long-term card layout with two major long-term business tracks for drinking water and sugar-free tea. The ability of flavored beverages to promote new products continues to be verified, and the company's value is still outstanding.
Investment advice: The texture is still excellent, keep an eye on the progress of adjustments, and maintain the “recommended” rating. Although the company's current packaged water market share has rebounded, it is expected that it will still be in an adjustment period for some time to come. We lowered our 24-26 EPS forecast to 1.11/1.28/1.45 yuan (the original forecast was 1.25/1.44/1.63 yuan), and the current stock price corresponds to 25 times PE in 24 years. Considering that the soft drink circuit is relatively prosperous in the long run, the company's high-quality leading background will not change. It is recommended to keep an eye on the progress of the adjustments. Considering the company's excellent quality and small actual distribution market, a target price of HK$36 was given, corresponding to about 30 times PE in 24 years, maintaining a “recommended” rating.
Risk warning: Demand for terminals is sluggish, new product expansion falls short of expectations, raw material prices fluctuate greatly, etc.