2Q24 results are basically in line with our expectations

The company announced 1H24 results: 2Q24 revenue 0.61 billion yuan, -6.8% YoY; net profit to mother 0.071 billion yuan, -10.9% YoY; net profit after deducting 0.063 billion yuan of non-net profit, +6.1% YoY. The results were largely in line with our expectations.

Development trends

Revenue is under pressure, and Chinese polymodulation is driven by growth. On the revenue side, the company's 2Q24 revenue was -6.8% YoY. We expect that the Food Extraction List (consolidated in early May 2023) will contribute about 5ppt to revenue growth. The poor performance of the main business is mainly due to the high pressure on the growth of hot pot base. By product, 2Q24 hot pot base revenue was 0.2 billion yuan, or -23% year over year. We expect the main reason for the weak consumption environment and the diversion impact of small to medium white brands; 2Q24 Chinese compound revenue was 0.39 billion yuan, +4.7% year over year. We calculated and deducted the impact of the merger, and endogenous revenue fell by a single digit year on year; by channel, 2Q24 e-commerce and offline channel revenue were +57%/-15% year over year, respectively. The main reason for the high increase in e-commerce revenue was due to food extraction and the company actively strengthened its online layout. Looking at the subregions, revenue from the main western/eastern markets was +2.4%/-5.8%, respectively, and the dominant market performance was better than the overall performance.

2Q24 profit margins are affected by scale effects and non-current accounts. The 2Q24 company's gross profit margin was 33.3%, compared to +2.2ppt. Mainly due to the high gross margin performance of the Chinese style rebalancing performance and cost reduction, we believe the cost dividend is expected to continue. On the cost side, the 2Q24 sales/management/R&D expense rates were -0.7/-1.4/ +0.6ppt, respectively. The company strengthened cost management, and the cost ratio improved. Net income from 2Q24 investment decreased by 0.017 billion yuan year on year, while 1H24 remained basically flat, mainly due to changes in the pace of confirmation due to fluctuations in financial management maturity nodes. In summary, net profit to mother in 2Q24 compared to net profit after deduction -10.9%/+6.1% year-on-year.

Pay attention to the performance of food extracts and the effects of new products. After 1H24's Dahongpao C-side business was merged into good management, due to strategic adjustments and sales fluctuations, we expect the company to make up for the decline in Dahongpao C-side sales through channels and product sorting. Currently, the company has 0.6 million sales outlets nationwide. The company is improving sales capacity through digital transformation of marketing and exploring profit sharing models of product code marketing. 1H24 has successively launched new products such as fish in tomato sour soup, pickled pepper fish, and sauce-flavored hot pot, and continuously improved the product matrix.

Profit forecasting and valuation

Considering weak demand, we lowered 2024/25 revenue by 8.6%/16.0% to 3.32/3.49 billion yuan, considering declining costs and improving profitability, maintaining net profit of 0.54 billion yuan in 2024, considering the 2025 revenue adjustment, and reducing net profit to mother by 7.6% to 0.6 billion yuan in 2025. The current stock price was traded at 20.1/18.1 times P/E in 2024/25. Considering profit forecast adjustments and sector valuation changes, the target share price was lowered by 19.4% to 12.5 yuan/share, corresponding to 24.7/22.2 times P/E in 2024/25, with 22.9% upside compared to the current price. Consider that the company is a leading enterprise in the retouching industry, and continues to promote new product development and channel optimization to maintain a superior industry rating.

risks

The promotion of new products fell short of expectations, increased industry competition, and food safety risks.