occurrences

Company Announces 2024 Interim Report. With 2024H1, the company achieved total revenue of 5.364 billion yuan (+1.25%), net profit of 0.296 billion yuan (+25.26%), after deducting non-attributable net profit of 0.313 billion yuan (+36.39%).

In a single quarter of 2024Q2, the company achieved total revenue of 2.751 billion yuan (-0.94%), net profit to mother 0.207 billion yuan (+17.72%), and net profit not attributable to mother of 0.213 billion yuan (+37.66%).

East China is growing steadily, while North China and other regions are growing faster

1) Liquid milk is growing steadily. 2024H1, the company's revenue for liquid milk, milk powder and other products was 4.844, 0.035 and 0.486 billion yuan respectively, +0.54%, -15.20%, and +10.64% compared with the same period last year.

2) Direct sales channels are stable, and dealer H1 has been optimized. 2024H1, the company's direct sales and distribution revenue was 2.755 and 2.124 billion yuan respectively, +1.29% and -0.72%. At the end of H1, the company had a total of 3,296 dealers, +9.18%, a net decrease of 113 H1, and a change rate of -3.31%; by region, the number of H1 dealers in southwest China and North China is growing, and the number of dealers in East China, Northwest China, Central China and other regions has been optimized.

3) East China is growing steadily, while North China and other regions are growing faster. 2024H1, the company's revenue in Southwest China, East China, North China, Northwest China and other regions was 18.75, 15.03, 0.536, 0.679, 0.771 billion yuan, -6.87%, +4.66%, +20.21%, -12.68%, and +23.42%, respectively.

4) Kunming Shenlan is growing steadily. 2024H1, the company's subsidiaries Sichuan Dairy, Kunming Seran, and Huanmei Dairy had revenue of 0.807, 0.639, and 0.949 billion yuan, respectively, or -1.78%, +1.25%, and -5.13%. Net interest rates were 6.70%, 5.03%, and 7.10%, respectively, -1.13, -0.17, and -1.64pct.

Raw milk prices have declined, and the company's profitability has steadily increased

1) Raw milk prices have declined, and the company's profitability has steadily increased. 2024H1, the company's gross margin was 29.23%, +1.26pct year on year, mainly due to the drop in milk prices. Among them, direct sales and distribution gross margins were 34.23% and 28.15%, respectively, +1.72 and +2.82pct; net profit margin to mother was 5.53%, +1.06 pct year on year. 2024Q2, the company's gross margin was 29.09%, +0.29pct year on year; net profit margin to mother was 7.51%, +1.19pct year on year.

2) The overall cost rate for 24H1 is relatively stable, and the cost rate for 24Q2 has improved year-on-year. 2024H1, the company's sales, management, and financial expense ratios were 16.12%, 4.47%, and 1.00%, respectively, +0.46, +0.52 pct. The increase in sales expenses was mainly due to an increase in marketing expenses, and the decline in the financial expense ratio was mainly due to a year-on-year decline in weighted principal and average interest rates on bank loans. In 24Q2, the company's sales, management, and financial expense ratios were 15.21%, 3.88%, and 0.95%, respectively, -0.60, -0.38, and -0.49pct. The cost ratio improved year-on-year.

3) Reduced credit impairment losses. 2024H1, the company's credit impairment loss/revenue was -0.24% (positive number indicates loss), -0.50pct year over year. Mainly due to the continuous optimization of the company's accounts receivable age, the default loss rate declined.

The low temperature series continues to grow, and products continue to innovate and iterate

1) The company insists on promoting the iteration of new products. The company insists on improving consumer value as the core and continuously launching new products. 2024H1 continues to maintain double digits in revenue, becoming an important engine driving growth, including:

a) The “Huorun” series achieved a 15% year-on-year increase through new products. Among them, the new “Huorun Crystal Ball” product led the Crystal Ball series to grow by more than 40%.

b) Various types of low-temperature flavored milk were launched, driving the overall growth of low-temperature flavored milk by more than 40%.

c) Revenue from new normal temperature organic pure milk products increased by more than 50% in H1. Room temperature high-end brand “Australia” organic series products increased 20% year over year, and the share of mid-range and high-end white milk continued to increase.

2) The company adheres to the “fresh cube” strategy. 2024H1, the company's “24 hours” continued its national matrix layout. The middle and high-end series increased by more than 30% year over year; the high-end brand Asahi Vipin Fresh Milk increased by about 15% year over year, and the company's overall high-end fresh milk also increased by about 15% year over year.

3) The company innovates and integrates marketing, optimizes channels, and the emerging channels are growing rapidly. On the subscriber side, the company has established a multi-scenario closed loop of direct service to users through local network transformation; through cross-industry cooperation, it has further enhanced offline and online subscription to drive new linkages. In terms of stores, the company strengthened the “five online”, namely online stores, online marketing, online inventory, online settlement, and online members, to continuously improve operational service capabilities and levels. In terms of far-field e-commerce, “618” sales increased 15% year over year, while Douyin and Pinduoduo's performance grew even faster.

Investment advice

We expect the company's net profit for 2024-2026 to be 0.542/0.658/0.787 billion yuan, respectively, with a growth rate of 25.86%/21.40%/19.53%, corresponding to PE 14/12/10X (market value 7.7 billion yuan) on August 30, respectively, maintaining the “buy” rating.

Risk warning

Risk of fluctuations in consumption scenarios, risk of fluctuations in raw milk prices, risk of policy adjustments.