Incident: The company released its 2024 semi-annual report. 24H1 achieved operating income of 3.665 billion yuan, -4.91% year over year; realized net profit to mother of 0.333 billion yuan, or -23.75% year on year; realized deducted non-net profit of 0.269 billion yuan, or -29.60% year over year. Looking at a single quarter, 24Q2 achieved operating income of 1.412 billion yuan, -4.74% year over year; realized net profit to mother of 0.103 billion yuan, or -34.36% year over year; realized deducted non-net profit of 0.071 billion yuan, or -49.36% year over year.

The pressure of traditional noodle rice continues, and the B-side continues to develop. By market, the 24H1 retail and innovation market achieved revenue of 2.985 billion yuan, -7.5% year over year, mainly due to the continuous decline in KA system passenger traffic, superposition companies strengthened accounts receivable risk control over direct supermarket systems; the catering market achieved revenue of 0.68 billion yuan, +8.1% year over year. Major catering customer departments launched a series of innovative products through measures such as improving product quality, improving process efficiency, and strengthening systematic customer service. By product, 24H1 quick-frozen rice products achieved revenue of 3.141 billion yuan, or -5.77%, of which the total revenue for rice dumplings, dumplings, and rice dumplings was 2.061 billion yuan, or -7.77%; revenue from innovative noodle products was 1.08 billion yuan, or -1.70%; quick-frozen prepared food achieved revenue of 0.464 billion yuan, +2.00% year over year; and revenue from refrigerated and short warranty categories was 0.03 billion yuan, -21.81% YoY. By channel, 24H1 distribution achieved revenue of 2.757 billion yuan, -7.14%. As of the beginning of the year, the number of dealers in 24H1 was 3,911, a net decrease of 334 (152 in the north of the Yangtze River and 182 in the south of the Yangtze River), mainly due to channel quality optimization; direct management achieved revenue of 0.706 billion yuan, or -5.97%; direct e-commerce achieved revenue of 0.173 billion yuan, +60.12% year over year, and e-commerce channels continued to improve their operating capacity with the introduction of professionals.

Gross profit declined, spending increased, and 24Q2 profits were under pressure. The 24H1/24Q2 company achieved a gross profit margin of 25.94%/24.87%, compared to -1.73/-1.80 pcts. The decline in gross margin is expected to be mainly due to a decrease in the share of dumplings, rice balls, etc., increased promotion intensity, and limited fixed cost dilution. The 24Q2 sales expense ratio was 13.04%, +3.04pcts year over year, and the year-on-year increase in the rate was mainly due to increased market expenses; the management/R&D/finance cost rates were 3.79%/0.74%/0.01%, respectively, +0.01/+0.19/ +0.10pcts; in addition, due to prudential considerations, the company calculated impairment preparations for some machinery and equipment, and impairment losses on single Q2 assets increased 10.79 million yuan year over year.

Under the combined influence of the above factors, 24Q2 achieved a net interest rate of 7.32%, -3.30pcts year on year; deducted non-net interest rate of 5.05%, or 4.45 pcts year on year.

Investment suggestions: The company follows the development trend of the industry and continues to optimize the product system. The C-side continues to promote new products, and the rice and noodle category launches the Sanquan Golden Ratio dumplings and new zongzi series; the B-side focuses resources on the quick-frozen hot pot food track, increases resource investment in hot pot balls, beef and lamb products, and gradually invigorates the quick-frozen pre-prepared dish circuit. Revenue for 2024-2026 is expected to be 6.9/6.98/7.09 billion yuan, respectively, -2.3%/+1.2%/+1.6%; net profit to mother is 0.63/0.66/0.7 billion yuan, -15.5%/+5.9% YoY. The P/E corresponding to the current stock price is 15/14/13 times, respectively, maintaining the “recommended” rating.

Risk warning: Product promotion falls short of expectations, channel expansion falls short of expectations, sharp rise in raw material prices, increased industry competition, food safety risks, etc.