Incident Overview

The company released its mid-year report. The company's 24H1 achieved operating income of 22.17 billion yuan, +8.4% year-on-year, and net profit to mother of 6.24 billion yuan, or +8.0% year-on-year.

Analytical judgment

Due to pressure from public opinion in the first half of the year, tea drinks continued to grow at a high rate of 24H1. Packaged water/tea drinks/energy drinks/juice drinks achieved revenue of 85.3/8.43/2.55/ 2.11 billion yuan, respectively, compared with -18.3%/+59.5%/+3.8%/+25.4%, respectively. In January-February 2024, the company's packaged water revenue was +19.0% year-on-year, but since the end of February, public opinion affected the growth of the packaged water business in the first half of the year. Among tea drinks, we believe that Oriental Leaf continues its high growth trend as a representative product of sugar-free tea. Tea pi strengthens the product base and is expected to achieve good growth in line with the landmark promotion of new flavors in the first half of the year. As for juice drinks, we believe that better growth will be driven by consumer demand for health. We believe that in the first half of the year, the company concentrated on the two major business segments of packaged water and tea drinks, and still achieved a slight year-on-year increase under the premise that the base was relatively high last year.

The decline in gross margin was offset by a reduction in the cost ratio. The net profit margin was relatively stable at 58.8% of 24H1, -1.4 pct year-on-year, mainly due to 1) the launch and promotion of new pure water products; 2) the increase in cost sharing due to the decline in packaged water revenue; and 3) the increase in the price of raw materials for juice. The 24H1 sales/management expenses ratio was 22.4%/4.1%, respectively -0.5/-0.6 pct year on year; advertising and promotion expenses increased year on year, but logistics costs declined due to sales volume and structure, and sales expenses decreased slightly; management expenses were -4.8% compared to the same period last year, continuing a steady downward trend. The decline in gross margin was offset by a reduction in the expense ratio. Net profit margin was relatively stable in the first half of the year. 24H1 net interest rate was 28.1%, -0.1 pct year on year.

The number of inventory turnover days increased from 55 days at the end of '23 to 64.2 in mid-'24, with inventory levels still within manageable limits due to increased production preparation and end-of-period stocks of raw materials. The balance ratio increased by 14.9% in mid-'24 compared to 11.2% at the end of '23, mainly due to the company's increased use of notes receivable financing.

The beverage sector is expected to continue to grow at a high rate. We expect packaged water to resume the packaged water business in the second half of the year. We expect revenue to recover month-on-month in the second half of the year as public opinion recedes and the company's active clarification and active brand promotion. At the same time, the launch of new natural water products complements consumer demand for small-packaged water, and is expected to contribute more revenue as distribution and penetration rates increase in the future. In the beverage sector, we expect to maintain a good year-on-year growth rate for tea drinks and juice drinks in the second half of the year. On the one hand, consumer demand for health will drive the industry trend, and on the other hand, the company's long-term brand and channel layout will deepen, further deepening consumer awareness with the introduction of new flavors in the first half of the year.

Investment advice

According to the adjusted profit forecast in the company's interim report, total revenue for 24-26 was reduced from 50.01/58.01/66.95 billion yuan to 47.33/54.7/62.99 billion yuan; net profit to mother was reduced from 13.6/15.34/17.36 billion yuan to 12.77/14.59/16.74 billion yuan; and EPS was reduced from 1.21/1.36/1.54 yuan to 1.14/1.30/1.49 billion yuan. The closing price of RMB 24.691 (exchange rate 0.9128) on August 28, 2024 corresponded to PE 24/21/18 times, respectively, maintaining the “gain” rating.

Risk warning

Food safety risks; sharp rise in raw material prices; sales of new products falling short of expectations, etc.