Key points of investment

Petty Shares released its 2024 semi-annual report:

In the first half of 2024, the company achieved revenue of 0.846 billion yuan, a year-on-year increase of 71.6%, and achieved net profit of 0.098 billion yuan to mother, which reversed losses over the previous year. On a quarterly basis, revenue for the first quarter and second quarter of 2024 was 384 million yuan and 461 million yuan, respectively, up 142.4% and 38.1% year on year, respectively; net profit to mother was 0.42 billion yuan and 56 million yuan, respectively, which reversed losses year on year.

24H1 revenue increased high under a low export base, and independent brands continued to grow rapidly 1) Export sales: The company's foreign sales revenue in the first half of 2024 was 0.689 billion yuan, +87.8% over the same period last year. The rapid increase in export sales revenue benefited from last year's low base and the recovery of export orders. According to the company's announcement, it is expected that the Southeast Asian plant will continue to operate well this year, and the New Zealand staple food factory has already stocked up orders from customers in Australia, the United States and Europe, bringing in new increases.

2) Domestic sales: In the first half of 2024, the company's domestic sales revenue was 0.157 billion yuan, +24.6% year-on-year. The revenue scale of the company's own brand business continued to grow rapidly (618 Jueyan increased 67% compared to last year), and the new staple food products achieved good expected results (during the 618 period, canned dog food ranked first in the Tmall trading list, and Jueyan's native dried dog food ranked first on Douyin's duck meat flavor dog staple food list and Jingdong style dried dog food list).

The recovery of orders led to an increase in gross margin, and profits from overseas bases gradually released gross margin levels of 26.4% in the first half of 2024 (only 15.5% in the same period last year), and gross margin improved dramatically. On a quarterly basis, gross margins for 2024Q1 and 2024Q2 were 24.4% and 28.0%, respectively, and also improved month-on-month. The recovery in gross margin was mainly due to the gradual increase in capacity utilization after export orders resumed, thereby improving profitability.

By product, gross margins of animal skin chewing, vegetable chewing gum, nutritious meat snacks, staple food, and wet food were 22.8%, 29.0%, 29.9%, and 22.2%, respectively, with year-on-year improvements of +11.5pct, +7.9pct, +16.8pct, and +3.2pct, respectively. Among them, the improvement in gross margin of nutritious meat snacks is mainly driven by popular products such as Jueyan dried duck meat.

Looking at production capacity bases, 1) Vietnam is currently operating at maturity. Vietnam's production base remained operating at full capacity in the first half of the year 24, and was the main source of profit. Vietnam Dexin achieved profit of 0.031 billion yuan in the first half of 2024; 2) Cambodia: The capacity utilization rate of the Cambodian production base was rapidly released in the first half of 2024, achieving a profit of 0.018 billion yuan in the first half of 2024 (loss 0.013 billion yuan for the same period of 23).

Profit forecasting and valuation

As export sales gradually returned to normal, new factories contributed revenue and increased capacity utilization to release profits to ensure the company's future revenue and profit growth. Petty's 2024-2026 revenue is expected to be 1.955/2.412/2.825 billion yuan, respectively, and +38.52%/+23.38%/+17.12%, respectively; 2024-2026 net profit to mother will be 1.70/2.11/0.248 billion yuan, respectively, reversing the year-on-year loss/+23.55%/+17.74%, respectively. The corresponding PE is 18.18x, 14.72x, and 12.50x, respectively, maintaining the “buy” rating.

Risk warning

Independent brand cultivation falls short of expectations; overseas demand falls short of expectations; high customer concentration; risk of exchange rate fluctuations