Incidents. The company released its 2024 semi-annual report: 24H1's main business revenue +11.9% YoY to 2.927 billion yuan, and net profit to mother -13.8% YoY to 0.308 billion yuan.

It is convenient for fast food to stop falling and recover, and the B-side sets the tone for rapid growth. By product: 24H1 Hot Pot Seasoning revenue +5.6% YoY (volume +21.4%, price -12.9%), with related/third party revenue +5.7%/+5.6% YoY.

The revenue performance of compound seasonings was impressive, with 24H1 revenue +24.4% (volume +30.5%, price -4.7%), with third party revenue +24.1% (volume +27.9%, price -3.0%), mainly due to the launch of new crayfish seasoning products and B-side fixed revenue growth; related party revenue +29.9% year-on-year, mainly benefiting from the listing of maocai and spicy seasoning products. The revenue of convenient fast food stopped falling and rebounded, +22.2% (volume +39.9%, price -12.6%). Among them, revenue from related parties was +167.7% year-on-year, mainly due to increased sales volume of puffed and braised products; benefiting from the upgrading and promotion of small hot pot products, third party revenue was +14.5% year-on-year. Channel division: 24H1 companies' relates/third-party customer sales revenue was +11.5%/+12.1% YoY, with distributor/e-commerce channel revenue +10.1%/+12.4%, respectively. The B-side customized meal preparation market performed well, with the revenue of catering and food companies +100.7% year-on-year to 0.067 billion yuan.

The reduction in the sales price of hot pot condiments by related parties dragged down the overall gross profit margin. 24H1 gross margin was -0.54 pct to 30.0% year over year, mainly due to the price of the related party's hot pot base adjusted according to the market (-15.7% per ton price); among them, gross margin of hot pot base/Chinese compound seasoning/convenient fast food was -1.64pct/+1.70pct/+1.44pct to 31.3%/34.7%/24.7% year-on-year, respectively. The company's production capacity allocation continues to be optimized. 24H1 convenience food production capacity of 0.028 million tons and butter production capacity of 0.057 million tons have been put into operation one after another, which helps the company relieve the pressure on production capacity during the peak season.

Online marketing and promotion have been strengthened, and net interest rates due to mother are under pressure. The company strengthens e-commerce channel development to further attract young consumers through IP co-branding, pop-up events, and music festival interactions; at the same time, it has further improved the partner assessment mechanism, emphasized incremental profits, and fully mobilized employees' enthusiasm. The 24H1 sales expense ratio was +2.87pct to 12.0% year over year, mainly due to the increase in online marketing expenses and transportation costs (advertising and other marketing expenses/ transportation and related expenses rates were +1.51pct/+0.50pct to 2.8%/3.5% year over year, respectively); management expenses ratio -0.59 pct to 4.8% year over year. Due to a decline in gross margin, an increase in sales expenses and a decline in other revenue and revenue (-64.0% YoY), 24H1 net profit margin was -3.14pct to 10.5% year-on-year.

Profit forecasting and investment advice. We expect the company's 2024-2026 EPS to be 0.83, 0.93, and 1.03 yuan/share, respectively. According to the average valuation of comparable companies, the company was given 16-20 times P/E in 2024, with a corresponding reasonable value range of 13.26-16.58 yuan/share. Based on the HKD/RMB 0.9 exchange rate, it corresponds to a reasonable value range of HK$14.74-18.42 per share, maintaining a “superior to market” rating.

Risk warning. Competition in the industry intensified, channel expansion fell short of expectations, sales of new products fell short of expectations, and food safety issues.