Incident: Petty Co., Ltd. released its 2024 mid-year report. In the first half of 2024, it achieved operating income of 0.846 billion yuan, +71.64% year over year; net profit to mother of 0.098 billion yuan, loss of 0.043 billion yuan for the same period in 2023; net profit of 0.096 billion yuan after deducting non-return to mother, a loss of 0.044 billion yuan for the same period of 2023. Among them, 24Q2 achieved operating income of 0.461 billion yuan in a single quarter, +38.06% year-on-year; net profit to mother of 0.056 billion yuan, loss of 0.005 billion yuan in the same period in 2023; net profit after deducting non-return to mother of 0.056 billion yuan, a loss of 0.005 billion yuan for the same period in 2023.

Overseas orders performed well, and domestic independent brands are progressing positively. By region, 24H1 achieved revenue of 0.689/0.157 billion yuan abroad and 0.157 billion yuan respectively, +87.79%/+24.55% over the same period last year. Overseas markets recovered well, and 24Q2 revenue increased further month-on-month. According to the latest order feedback, 24H2 continues to perform well overseas.

Domestic self-owned brand business revenue is growing well. Among them, Jueyian brand revenue achieved a high growth rate. Jueyan launched dried food products in May and gradually entered the staple food circuit. New staple food products are positioned in the middle and upper end groups, and the early performance was good. 24H2 is also planning to launch other new staple food products. By product, 24H1 animal skin chewing/vegetable chewing/nutritious meat quality/staple food and wet food achieved revenue of 2.63/0.298/0.19/0.082 billion yuan respectively, +87.85%/+114.62%/+38.39%/+34.86% compared with the same period last year. In the context of global snack staple food, the company's various snack categories are growing well. The New Zealand plant has gradually begun commercial large-scale production, and 24H1 has contributed to a certain increase in revenue.

The scale effect boosted gross profit margin and further increased profitability. In terms of gross margin, 24H1/24Q2 companies' gross margins were 26.35%/28.02%, 24Q2 was +11.90pcts year over year, and +3.66pcts month-on-month. With the resumption of overseas orders, the gross margin of all categories has increased due to the scale effect; at the same time, the proportion of high-margin vegetable chewing gum categories has increased, and structural adjustments have further raised the gross margin level of consolidation. On the cost side, 24H1/24Q2 sales expense ratios were 6.01%/7.16%, 24Q2 -0.71 pcts year over year, and +2.52 cts month-on-month. The 24H1/24Q2 management fee rates were 5.89%/5.52%, 24Q2 -3.47pcts year-on-year, and -0.82pcts month-on-month. With the increase in capacity utilization, the company's management efficiency has been further improved. Taken together, 24H1/24Q2 companies' net interest rates to mother were 11.58%/12.19%, respectively, and +1.34pcts month-on-month in 24Q2. Net interest rates without return to mother were 11.31%/12.10%, respectively, and +1.73 pcts month-on-month in 24Q2. The company's profitability continues to recover. Looking ahead to 2024, with the release of production capacity, the Cambodian factory has switched from loss to positive profit compared to the same period in 24H1. ODM customers at the New Zealand staple food factory are in the main equipment commissioning stage. The 24H2 order volume is expected to increase further. Subsequent increases in capacity utilization are also expected to increase the company's profits.

Profit forecasting, valuation and rating: Considering that the company's New Zealand staple food business gradually brought in new volume, the capacity utilization rate of each plant increased, and profitability gradually increased due to scale effects. We raised our 2024-2026 net profit forecast to 0.174/0.215/0.257 billion yuan (up 39.38%/25.66%/22.85% from the previous time); the corresponding EPS for 2024-2026 was 0.70/0.86/1.03 yuan, and the current stock price corresponding P/E is 17/14/12 times, respectively. The growth performance of the company's overseas staple food business remains to be seen, and the “increase” rating is maintained.

Risk warning: rising raw material prices, risk of exchange rate fluctuations, and the performance of staple foods falling short of expectations.