Incidents. The company disclosed its 2024 interim report. In the first half of 2024, the company achieved revenue of 1.179 billion yuan (YOY 0.75%) and realized net profit to mother of 29.5 million yuan. Looking at 24Q2 alone, the company achieved revenue of 0.454 billion yuan (YOY -7.54%) and realized net profit to mother - 54.71 million yuan.

Revenue is stable, and improved gross margin drives profit and loss reduction. Looking at 24H1, on the gross profit side, the company's revenue increased 0.75% year on year, and gross margin rose 2.69 pct year on year to 30.58% (mainly due to a decrease in raw material procurement costs and freight costs), so gross profit increased 10.47% year on year. On the cost side, the cost ratio for the period decreased by 2.92 pct year on year. Among them, the sales expense ratio decreased by 2.74 pct year over year (mainly due to a decrease in marketing expenses and advertising investment), the management cost ratio increased by 0.16 pct year on year (mainly due to an increase in equity incentive costs), and the R&D expense ratio increased by 0.27 pct year on year (mainly due to an increase in R&D projects). The final net profit to the mother was a loss of 29.5011 million yuan (loss of 44.0426 million yuan in the same period last year).

Looking at 24Q2 alone, on the gross profit side, the company's revenue decreased by 7.54% year on year, and gross margin increased by 2.13 pct year on year; on the expense side, the period expense ratio decreased by 0.79 pct year on year; net profit to mother was a loss of 54.71 million yuan (loss of 49.89 million yuan for the same period last year).

The brewing business strives to return to the mainstream of consumption in the milk tea market, reposition ready-to-drink products, and dig deeper into product consumption logic and market demand. By product, 2024H1's brewed and ready-to-drink revenue increased by -2.13% and 3.83%, respectively.

(1) In terms of brewed products, 2024H1 achieved revenue of 0.614 billion yuan. On the basis of reviewing the development history of the milk tea industry and closely tracking the current development trend of the milk tea industry, the company formulated a “four modernization” strategy of “category health, brand rejuvenation, product scenario, and routine consumption”, and actively promoted the company's milk tea product innovation with the “four modernization” strategy as the center, and strived to push the company's milk tea products back into the mainstream of milk tea market consumption.

(2) In terms of ready-to-drink products, 2024H1 achieved revenue of 0.547 billion yuan. Based on the ready-to-drink product development strategy, combined with the consumption logic behind consumer purchasing behavior, the company rearranged the relevant product positioning. Meco is a fresh fruit tea product. Based on the consumer's high correlation with fruit tea in tea shops, and the convenience and fashion sense of drinking and storage brought about by the “cup” form, the company repositioned the product as a “second choice outside of tea shops”; Lan Fangyuan frozen lemon tea products, combined with the product's effects of relieving heat, quenching thirst, and relieving fatigue and the characteristics of non-carbonated products, the company repositioned the product as a “healthy iced drink”.

Actively create model markets, explore new channels and new scenarios, and further develop growth momentum. Looking at 2024H1 by channel, the distribution channel achieved revenue of 1.017 billion yuan (YOY 2.91%), the direct sales channel achieved revenue of 0.04 billion yuan (YOY 26.4%), the e-commerce channel achieved revenue of 0.094 billion yuan (YOY -25.07%), and the export channel achieved revenue of 0.01 billion yuan (YOY 15.31%).

In the first half of 2024, the company launched a “model market” for Meco's two main ready-to-drink products, such as fresh fruit tea and Lan Fangyuan frozen lemon tea, to dig deeper into the business logic behind obtaining good feedback on related products, summarize successful experiences, and actively try to promote replication.

(1) In terms of snack mass sales channels, the company's products such as Xiangpiaopiao Milk Tea and Meco, such as fresh fruit tea, have entered snack mass sales systems such as Zhao Yiming, Snack Very Busy, and Wanchen Group through direct management. As of July '24, there were more than 0.02 million snack mass sales terminals covered by the company's direct management. (2) In terms of catering channels, the company made full use of the high adaptability of Meco, such as fresh fruit tea and Lan Fangyuan frozen lemon tea, and actively developed catering channels represented by consumption scenarios such as high-end cafeterias, and achieved positive results. At the same time, the company is actively promoting the establishment of a catering channel dealer team. By the end of June '24, the company had developed more than 100 full-time ready-to-drink catering channel dealers. Furthermore, by the end of July '24, the company's products had sold more than 0.09 million automatic vending machines, and the cumulative number of frozen stores (not including vending machines) had increased significantly.

Profit forecasting and investment advice. We expect the company's revenue for 2024-2026 to be 3.906/4.439/5.013 billion yuan, net profit to mother of 0.337/0.403/0.496 billion yuan, respectively, and the corresponding EPS of 0.82/0.98/1.21 yuan/share, respectively. Combined with the valuation of A-shares comparable companies, the company was given a PE (2024E) valuation range of 16-20 times, with a reasonable value range of 13.12-16.40 yuan, continuing to give it a “superior to the market” rating.

Risk warning. (1) Market demand declined, (2) new product/channel expansion fell short of expectations, (3) fluctuating raw material costs, and (4) food safety issues.