1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 6.69 billion yuan, -4.1% YoY; adjusted net profit of 0.35 billion yuan, YoY -32.4%, lower than our expectations, mainly due to higher financial expenses than our expectations.

Development trends

The health products business has performed well, and milk powder is still being dragged down to a certain extent. 1H24's overall revenue was -4.1% YoY. Among them, ANC's revenue was +11.2% year over year, and the performance was significantly better than the industry, mainly due to strong growth in the high-end product line Swisse Plus+, which accounted for a double digit share of ANC in China. Cross-border revenue +12.1% YoY outperformed the industry, and beauty, vitamins and liver care products performed well; Australia and New Zealand also maintained double-digit year-on-year growth. BNC revenue was -22% year-on-year, of which milk powder was -18.8%, mainly due to industry pressure and the change of new national standards. Probiotic revenue was -32% year-on-year, affected by last year's high base and the decline in pharmacy traffic, which also had a certain impact on BNC's performance. 1H24 PNC's revenue was +4.1% year over year, mainly due to the company's strategic adjustments to lean resources towards high-end categories. PNC 1H24 sales volume in China was -14.8% year over year.

1H24 profit margins declined slightly, and refinancing was completed to optimize the debt structure. 1H24's ANC, BNC and PNC adjusted EBITDA profit margin levels were -1.5/-3.9/+2.2ppt, respectively. The overall adjusted EBITDA profit margin fell 1.8ppt to 17% year over year, in line with the company's early year guidelines. Among them, the ANC business was mainly due to an increase in the share of new markets and changes in the product portfolio; the decline in BNC profit margin was mainly due to increased investment in channel inventory removal and the lower cost base of the probiotic business last year. Considering that 1H24 completed refinancing, 1H24's financial cost was 0.43 billion yuan, +21% year over year. At the same time, the tax rate rose to 41.6% due to an increase in some non-deductible expenses, which dragged down 1H24's profit performance. The company's 1H24 adjusted net interest rate fell to 5.2%, and the adjusted net profit level was 0.34 billion yuan, -32.4% year-on-year.

Revenue is expected to remain stable throughout the year, and a smooth deleveraging process is expected to reduce financial expenses in the long term. We expect the company's revenue to remain stable throughout the year. Among them, the growth rate of the ANC business may slow down in the second half of the year, mainly due to the high 2H23 base; BNC may still face certain challenges in the second half of the year, while the PNC business is expected to maintain a 1H24 growth trend, the North American business is expected to remain steady, while the Chinese business is still being adjusted. In terms of deleveraging progress, the net leverage ratio of 1H24 was reduced from 3.42x of 1H23 to 3.36x. We expect this ratio to drop to around 3x for the whole year, and it may fall below 2.0x in the next 18-24 months. As the deleveraging process progresses steadily, we expect the company's financial expenses to decline year by year starting next year.

Profit forecasting and valuation

Considering the pressure on milk powder sales, the 24/25 profit forecast was lowered by 24.5%/22.5% to 0.71/0.86 billion yuan.

The company's current transaction is 7.0/5.6 times the 24/25 P/E; the target price was reduced by 20% to HK$10, corresponding 8.2/6.6 times 24/25 P/E and 17% upward space, maintaining the outperforming industry rating.

risks

Demand is weak; competition is intensifying; raw material prices are rising.