Key points of investment:

The company's performance was under pressure in the short term, and Q2 net profit declined year-on-year. According to the company's announcement, in the first half of 2024, the company achieved total revenue of 3.665 billion yuan, -4.91%; net profit to mother 0.333 billion yuan, -23.75%; net profit after deduction of 0.269 billion yuan, -29.60% year over year; and net operating cash flow of 0.317 billion yuan, which changed from negative to positive year on year. Among them, 2024Q2's revenue was 1.412 billion yuan, -4.74% YoY; net profit to mother was 0.103 billion yuan, or -34.36% YoY.

In the first half of 2024, the company's revenue and net profit declined due to factors such as a decline in the sales scale of the direct-run supermarket system and asset impairment.

There is still room for growth in the market size of the industry. Referring to Japan, the United States and other countries, food externalization and restaurant chains have jointly promoted a rapid increase in demand for standardized frozen products by catering companies. According to the company announcement, the chain rate of restaurants in China in 2022 was 19%, the US was 58.4%, and Japan was close to 50%. Compared to mature markets such as the US and Japan, there is still plenty of room for restaurant chains in China, thus further boosting the increase in demand for frozen food. On the other hand, starting in the first quarter of 2024, pig prices rebounded steadily. According to Steel Union data, from August 19 to 23, 2024, the average price of pigs sold nationwide was 20.60 yuan/kg, down 0.38 yuan/kg from last week, down 1.81% month-on-month, and 21.11% year-on-year. As pig prices stabilize, the pressure on the company to sell stuffed products such as dumplings is expected to gradually ease.

The overall demand for the company's products was poor, and e-commerce channels performed well. By product: 1) Revenue of frozen noodles and rice products was 3.141 billion yuan, -5.77% year over year; gross profit margin was 27.28%, -2.17 pcts year on year. 2) Revenue of frozen prepared food was 0.464 billion yuan, +2% year over year; gross profit margin was 15.2%, +1.38 pcts year over year. 3) Revenue of refrigerated and short-term warranty products was 0.03 billion yuan, -21.81% YoY; gross profit margin was 7.31%, -2.94 pcts YoY. By channel: 1) Distribution channel revenue was 2.757 billion yuan, -7.14% year over year; gross profit margin was 25.52%, -1.2 pcts year over year.

2) Direct channel revenue 0.706 billion yuan, -5.97% YoY; gross profit margin 25.23%, -4.1pcts YoY. 3) Direct e-commerce channel revenue was 0.173 billion yuan, +60.12% year over year; gross profit margin was 27.76%, -4.8 pcts year over year. Looking at market demand, through measures such as improving product quality, improving process efficiency, and strengthening customer service for major catering customers, the company's catering market business continued to grow steadily. 2024H1 revenue was 0.68 billion yuan, +8.1% over the same period last year.

The first coverage gave the granting company an “added weight” rating. The company is a leading enterprise in the domestic frozen rice and noodle industry. Considering the growth of the company's catering channel and e-commerce channel, the net profit forecast is expected to be 0.806/0.858/0.906 billion yuan in 2024/2025/2026, and the EPS is 0.92/0.98/1.03 yuan, respectively, and the corresponding PE is 11.28/10.59/10.04 times. According to the average price-earnings ratio of comparable companies in the industry, the company will have a certain amount of room for valuation expansion in the future, and Si Wei has an investment rating of “holding on to increase holdings”.

Risk warning: Channel expansion falls short of expectations, rising raw material prices, food safety incidents, etc.