Incident: The company released its 2024 mid-year report. In 2024H1, the company achieved revenue of 1.273 billion yuan, +12.89% year over year; realized net profit of 0.108 billion yuan, or -34.60% year over year; realized net profit without return to mother 0.099 billion yuan, -10.87% year over year. Looking at a single quarter, the company achieved revenue of 0.649 billion yuan, +10.29% year over year; realized net profit to mother of 0.048 billion yuan, or -46.75% year over year; realized net profit of 0.047 billion yuan without return to mother, or -14.79% year over year.

The product range is rich, and the BC-end two-wheel drive opens up room for growth. 1) By product, the company achieved revenue of 0.605/0.558/0.075 billion yuan in 2024H1 compound condiments/light cooking solutions/beverage dessert ingredients, +18.30%/+8.82%/+1.88%; single 24Q2 compound seasoning/light cooking solutions/beverage dessert ingredients achieved revenue of 0.301/0.291/0.04 billion yuan, +10.10%/+11.79%/+3.04% YoY. The company has been deeply involved in the field of compound seasonings for many years. In recent years, product applications and categories have gradually expanded, and light cooking products have been vigorously developed. 2) By sales channel, the company's 2024H1 direct sales/non-direct sales achieved revenue of 1.029/0.21 billion yuan, +13.60%/+8.87% YoY; single 24Q2 direct/non-direct sales achieved revenue of 0.521/0.11 billion yuan, +11.31%/+6.20% year-on-year. The basic market for the B-side market is stable, and the goals for the C-side are clear and continue to expand. The direct sales model started early. Relying on the endorsement of Yum Sheng, the company's customers have established long-term and stable cooperative relationships with domestic and foreign restaurant chains and large B customers. In recent years, they have also been actively seeking small to medium B breakthroughs, which has promoted the steady and progressive development of revenue. Furthermore, the company continues to expand its C-side business through its subsidiary Kitchen Affin. Among them, Empty Pasta maintains a leading position in the fast food pasta segment and has become the second growth curve. Through the e-commerce direct management model, self-operated stores have been set up on third-party online platforms such as Tmall, Taobao, JD, Douyin, and Xiaohongshu, expanding the scope of business coverage, boosting online channels, and further expanding the C-side market. For non-direct sales channels, the company further enhances its market share and market popularity by increasing the number of distribution customers. 24Q2 achieved 445 distribution customers, an increase of 58 over the previous quarter.

Gross margin declined slightly, cost efficiency increased significantly, and R&D investment was further expanded. 1) On the revenue side, the company's 2024H1 gross profit margin was 32.07%, -2.7 pct year on year; single 24Q2 gross profit margin was 32.1%, -2.38 pct year on year. We expect that the slight decline in gross margin is due to changes in product structure and the risk of price fluctuations of major raw materials due to the continued increase in the share of low-margin B-side businesses. 2) On the cost side, the company's expense ratio for the 24H1 period was 19.14%, -1.17pct year-on-year, and the sales/management/R&D/finance expenses ratio was 14.96%/2.43%/1.95%/-0.2%, respectively, with year-on-year changes of -0.47/-0.79/0.01/0.07pct, respectively. The cost rate for the 24Q2 period was 19.3%, -0.81 pct year on year, and the sales/management/R&D/finance expenses ratio was 15.06%/2.49%/1.97%/-0.21%, respectively, with year-on-year changes of 0.25/-1.38/0.26/0.06pct, respectively. Through refined management, the quality of organizational operations has been improved, and management efficiency has been improved. At the same time, the company continues to meet market needs and enhance R&D capabilities. Focusing on core independent R&D capabilities, we actively carry out in-depth cooperation with innovative supply chains and Internet food creative food companies to give full play to the dual advantages of R&D and product side. 2024H1 R&D expenditure increased 13.56% year on year, and the number of new product developments increased by more than 11% year on year over the same period last year, further increasing the contribution rate to performance.

Profit forecast and investment advice: Baoli Foods has a rich product line, high-quality customer resources and R&D foundation. Although short-term profitability is under slight pressure due to product restructuring, the company continues to expand its rich product line, implement a BC-end two-wheel drive strategy, and the long-term value has not changed. We expect revenue of 2.433/2.92/3.464 billion yuan in 24-26, net profit of 0.285/0.344/0.413 billion yuan, PE 15.63/12.96/10.80x respectively, maintaining the recommended rating.

Risk warning: risk of macroeconomic growth falling short of expectations; risk of increased industry competition; risk of food safety.