1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 2.9 billion yuan, +11.9% YoY; net profit to mother of 0.31 billion yuan, -13.8% YoY, in line with our expectations and market expectations. The mid-term dividend rate of 95% exceeds market expectations.

Development trends

Third-party performance was stable, and remodulation and fast food showed a good recovery trend. 1H24's third party revenue was +12.4% year-on-year, with hot pot toppings increasing +5.7% (volume +15.6%, ASP -8.6%), mainly driven by slightly increased promotion and better performance of new low-priced dipping sauces; complex and fast food 1H24 revenue was +24.1% year-on-year, with impressive performance, mainly benefiting from the good growth of crayfish stew and new French garlic flavors. Easy fast food revenue recovered +14.5% year-on-year growth in the same period last year. Among them, new self-heating small hot pot products such as pork belly performed well. Looking at the company's third party business performance in the first half of the year, the company also actively promoted the sale of new products and adjusted partner assessments to incremental assessments to mobilize enthusiasm, and achieved good results in the first half of the year. At the same time, in the first half of the year, the company actively developed e-commerce and 2B-side businesses. 1H e-commerce revenue was +12.4% year-on-year, and both small B and overseas businesses grew by more than double digits. The revenue of 1H related parties was +11.5% year-on-year, with sales volume +34.1% and ASP -17.7%, which dragged down revenue performance, mainly due to declining raw material prices and related parties lowering the prices of some products.

The 1H24 gross sales gap weakened year-on-year, and foreign exchange and government subsidies dragged down reporting profits. 1H24's gross margin decreased by 0.5ppt year on year, mainly because the gross margin of the related party's hot pot base was -3.6ppt to 14.7% year over year due to the price reduction. The gross margin of third party bottom/compound/fast food benefited from lower costs and higher gross margin of new products, which increased 0.4/1.6/2.7ppt year-on-year respectively. In terms of sales expenses, the company strengthened brand promotion and e-commerce investment in the first half of the year. The A&P/transportation cost ratio increased by 1.5/0.5ppt, respectively. Overall, the gross sales margin declined year-on-year. Taking into account the impact of government subsidies and exchange losses, profit in the 1H24 statement was under pressure. A year-on-year decline of 13.8% was recorded, and the net interest rate was -3.1 ppt to 10.5% year over year.

Revenue is expected to maintain double-digit growth in the second half of the year, and long-term B-side and overseas businesses are expected to continue to contribute to the increase. We expect third party revenue to maintain healthy double-digit growth in the second half of the year, benefiting from factors such as continuous new product launches, incentive system adjustments, and the early Spring Festival. At the same time, the company is actively exploring B-side and overseas business. 1H24 overseas business accounts for 6.8%. With Tehai's overseas expansion and the company's initiative to develop third-party brand business in Southeast Asia and Europe, we expect future overseas business and B-side to contribute to long-term revenue growth. The company's overall profit margin is expected to remain flat year-on-year in the second half of the year, considering that the price of chili peppers may rise higher in the first half of the year.

Profit forecasting and valuation

The profit forecast for 24/25 is basically maintained. The company is currently trading at 12.1/10.7 times 24/25 P/E; maintaining a target price of HK$15, corresponding to 16.1/14.2 times 24/25 P/E and 33% upward space, maintaining an outperforming industry rating.

risks

Demand is weak; competition is intensifying; raw material prices have risen sharply.