1H24 results are in line with our expectations
The company announced 1H24 results: revenue of 22.17 billion yuan, +8.4% year-on-year; net profit to mother of 6.24 billion yuan, +8.0% year-on-year. The results were in line with our expectations.
Development trends
Rapid growth in sugar-free tea hedged the adverse effects of packaged water, and 1H24 revenue achieved high unit growth. Looking at 1H24 revenue categories: revenue from water, tea drinks, energy drinks, and juice was -18.3%, +59.5%, +3.8%, and +25.4%, respectively. Among them, packaged water revenue increased 19% year-on-year in January-January 2024, and performed well in the first half of the year, but overall sales were under pressure in the first half of the year. The company launched 550ml pure aquatic products in April to give consumers more choices, accelerate water education, and meet the company's expectations since launch; tea drinks have maintained strong growth, mainly benefiting from the rapid growth of Oriental leaves. Against the backdrop of rapid growth in the sugar-free tea industry, Oriental Leaf's product strength and brand strength continued to gain consumer recognition and increased market share. , good performance. Benefiting from product upgrades, juice drinks continued to grow well in the first half of the year; sales growth of functional drinks declined somewhat, mainly due to the company's resource investment in water, tea and juice categories.
Profit margins were stable year-on-year in the first half of the year, and product structure optimization hedged against adverse effects. 1H24's gross margin decreased by 1.4ppt year on year, mainly due to the decline in packaged water affecting scale effects, pure water promotion (mass sales promotion price 9.9 yuan), and the year-on-year increase in juice raw materials. In terms of cost, due to the continuous increase in the proportion of tea with a relatively low cost rate in the product structure, logistics rate savings offset the increase in advertising costs. The 1H24 sales rate was -0.5ppt year on year. In addition, thanks to cost control, the management rate was -0.6ppt year on year. By category, 1H24 water, tea drinks, energy drinks, and juice OPM were -4.2ppt, +1.0ppt, and -5.9ppt, respectively. The profit margins of tea drinks continued to be high in the context of increased promotions.
It may take time for packaged water sales to recover, and the competitiveness of the beverage industry continues to strengthen. Our grassroots research shows that packaged water sales are still under pressure in July-August. The company expects the impact of public opinion on brand power and the recovery of red water bottles may still take time, so this year's marketing focus will focus on improving brand reputation and promoting product quality. In terms of beverages, with the strong product strength of Oriental Leaves and flexible pricing strategies in some regions, we believe that the company is expected to maintain rapid growth and consolidate its leading position. The market is concerned about the potential profit margin impact of the decline in the scale of water and discounts on pure water. We believe that in the long run, the company has comprehensive advantages such as products and channels. Although the short-term impact has slightly slowed revenue growth, overall performance is still superior to the industry. Profit margins may face slight downward pressure, but in the medium term, the company will strive to steadily increase profit margins. We believe that the company still has long-term investment value, and it is recommended to focus on the progress of packaged water recovery.
Profit forecasting and valuation
The profit forecast for 24/25 is basically maintained. The company's current transaction is 21.6/19.1 times the 24/25 P/E; considering the declining market valuation, the target price was lowered by 22% to HK$35, which corresponds to 27.9/24.7 times the 24/25 P/E and 29% upward space, maintaining the outperforming industry rating.
risks
Demand is weak; competition is intensifying; raw material prices have risen sharply.