Event: The company publishes its 2024 mid-year report. According to the company announcement, 2024H1 achieved total operating income of 5.36 billion yuan, a year-on-year increase of 1.25%, net profit to mother 0.296 billion, an increase of 25.3% year-on-year, and net profit of 0.313 billion yuan after deducting non-return net profit of 0.313 billion yuan, an increase of 36.4% year-on-year. Among them, the 2024Q2 company achieved total operating income of 2.75 billion yuan, a year-on-year decrease of 0.94%, net profit to mother 0.207 billion, an increase of 17.7% year-on-year, and net profit after deducting 0.213 billion yuan of non-return to mother, an increase of 37.66% over the previous year. The company's revenue and profit are in line with expectations.

Investment rating and valuation: Taking into account the pressure from external demand, the profit forecast was lowered to forecast that the company's net profit from 2024 to 2026 would be 5.15, 6.48, 0.806 billion (5.47, 6.75, 0.822 billion), with year-on-year increases of 19.6%, 25.9%, and 24.2%, respectively. The latest closing price corresponding to 24-26 PE was 14x, 11x, and 9x, respectively. The company vigorously develops the fresh milk business under its “fresh strategy”, and relies on mergers and acquisitions to form a “1+N” brand matrix and national fresh milk layout, and relies on New Hope Group to enjoy advantages in milk sources, cold chain, and channels. The company launched a new five-year strategy in 23, clarifying the goal of increasing profit margins. In the future, it will develop and iterate the low-temperature fresh milk and specialty yogurt business, build core user barriers through direct D-to-C channels, and achieve increased penetration through intensive regional cultivation. We believe that in the future, the company can continue to unleash endogenous growth potential and maintain an increase rating.

The low temperature business continues to grow. According to the company announcement, 2024H1 achieved operating income of 4.879 billion yuan for liquid milk and dairy products, up 0.4% year on year. In terms of split volume price, sales volume was 0.556 million tons, up 3.35% year on year, and the tonnage price was 8769.7 yuan/ton, down 2.85% year on year.

By category, the low temperature business is expected to continue to grow positively in the first half of '24. Among them, the number of medium to high units of fresh milk increased, and yogurt also achieved an increase in medium units, while the performance of room temperature milk is relatively weak. The growth of the low temperature business is mainly due to continuous product iteration and upgrading under the company's fresh strategy. Among them, the “24 hour” series continues to be nationalized, the “24 hour” listing in Nanshan, Hunan, the middle and high-end series increased by more than 30% year on year, and the high-end brand Asahi Vipshop Fresh Milk increased by about 15% year on year, driving the overall high-end fresh milk to achieve about 15% year-on-year growth; in the low temperature yogurt sector, the “Active” series is expected to increase 15% year on year, mainly driven by new products. The room temperature business performance is under pressure, mainly due to weak demand for dairy products this year, and the price war in the industry is relatively intense. Looking at the subregions, 24H1 Southwest China, East China, North China/ Northwest China achieved revenue of 18.75/1.503/0.536/0.679 billion, respectively, or -6.87%/+4.66%/+20.21%/-12.68%, respectively. The main reason for the relatively weak performance in the southwest/northwest region is that room temperature milk accounts for a high proportion of room temperature milk, which is greatly affected by room temperature milk. Looking at the subsidiary companies, Sichuan Dairy/Kunming Seran/Huanmei Dairy 2024H1 achieved revenue of 0.807/0.639/0.949 billion respectively, or -1.8%/1.3%/-5.1%, respectively.

Profitability continues to increase, and net interest rate improvements have been realized. 2024Q2 achieved a gross profit margin of 29.08%, an increase of 0.27pct over the previous year, mainly due to the decline in raw milk prices. On the cost side, the company continues to promote quality and efficiency. The sales expense ratio decreased by 0.6 pct to 15.19% year on year. We expect that with the launch of new products in the future, advertising expenses will still require a certain amount of investment, but the overall cost ratio is expected to be smoothly optimized. Management expenses decreased by 0.36 pct to 3.89% year over year, mainly due to reduced depreciation and amortization expenses. The financial expense ratio decreased by 0.5 pct to 0.95% year on year, mainly due to a decrease in interest rates on bank loans. 2024Q2 achieved a net profit margin of 7.52%, an increase of 1.2 pct over the previous year, a net interest rate of 7.74% after deduction of non-return to mother, and an increase of 2.2 pct over the previous year. The greater increase in net interest rates after deducting non-return funds is mainly due to the impact of non-recurring losses due to the elimination of cows this year.

Risk warning: Market price war intensifies, food safety issues.