Core views

The company faced an unfavorable environment of low demand in Q2. The seasoning for Chinese dishes (accounting for 63.86%) was relatively stable, with a year-on-year increase of 4.75%, which is expected to be driven by the seasonal single crayfish seasoning.

Hot pot base (accounting for 32.16%) decreased by 22.94% year over year. The company focused on reducing costs and increasing efficiency. Q2 gross margin increased 2.19pcts to 33.33% year over year, but the company's investment income declined, causing the company's 24Q2 net profit margin to drop 0.53 pcts year on year to 11.53% year on year. As the company continues to strengthen its product capabilities and improve its channel layout, it is expected to catch up with the annual target in the second half of the year.

occurrences

The company released its 2024 mid-year report:

Within H1, the company achieved revenue of 1.468 billion yuan, a year-on-year increase of 2.95%; net profit to mother of 0.247 billion yuan, an increase of 18.79%; net profit after deducting non-return to mother of 0.21 billion yuan, an increase of 17.68% year-on-year.

In a single quarter of Q2, the company achieved revenue of 0.614 billion yuan, a year-on-year decrease of 6.80%; net profit to mother was 0.071 billion yuan, a year-on-year decrease of 10.9%; net profit after deducting non-return to mother was 0.063 billion yuan, an increase of 6.07% year-on-year.

Brief review

The seasoning for Chinese dishes is stable, and the hot pot base is pressurized

The company faced an unfavorable environment of low demand in Q2. By product, the seasoning for Chinese dishes (accounting for 63.86%) was relatively stable, with a year-on-year increase of 4.75%, which is expected to be driven by the seasonal single crayfish seasoning. The performance of hot pot base ingredients (accounting for 32.16%) was weak, down 22.94% year on year. In addition to weak demand, it is expected that poor sales of hot pot seasoning from the Dahongpao brand will also be dragged down by poor sales, and the company's marketing resources are also more focused on good brands. By channel, offline (accounting for 80.08%) was relatively weak, down 15.32% year on year, and online (accounting for 19.89%) performance was good, with a year-on-year increase of 57.37%, mainly due to better food extract performance and performance. By region, the West (accounting for 35.09%) and the South (accounting for 10.26%) performed well, with year-on-year increases of 2.44% and 0.42%, respectively. Other regions experienced declines. The East (22.42%), North (6.76%), and Central (25.43%) decreased by 5.77%, 29.21%, and 13.45%, respectively. At the same time, the company is still adjusting its dealers. There was a net decrease of 33 dealers in Q2. By the end of 24H1, the number of the company's dealers had dropped to 3150.

Gross margin increased markedly and sales rates declined

The company focused on reducing costs and increasing efficiency and deepening supply chain management reforms. Q2 gross margin increased 2.19pcts to 33.33% year-on-year, mainly due to lower raw material costs and optimization of the company's formula. In terms of expenses, the company's Q2 sales/management/R&D/finance rate changed year-on-year to -0.72/-1.39/+0.61/+0.28pcts. The reduction in the sales rate was mainly due to the improvement in the company's manpower efficiency, and the reduction in management rates was mainly due to the reduction in equity incentive cost sharing. However, the company's investment income declined markedly in Q2, which ultimately caused the company's net interest rate to fall by 0.53 pcts to 11.53% year-on-year in 24Q2.

The second half of the year gradually enters the peak season, and business is expected to improve

The company's operations fell short of target in the first half of the year, but the second half of the year gradually entered the peak demand season, and it is expected that there will be a month-on-month improvement. In terms of channels, the company's acquisition of Foodstuffs made up for the shortcomings of online channels for small to medium B customers, and the influence of the B-side market continued to increase. In terms of products, the company's ability to create single products has been highlighted in recent years, and sales of seasonal condiments such as crayfish have further promoted the company's development and channel penetration. The company is also continuously improving operating efficiency internally, and efficiency improvements have been achieved from production to marketing. Considering that the company's complex industry is still growing, judging from the penetration rate, there is still plenty of room for improvement. As the company continues to strengthen its product capabilities and improve its channel layout, it is expected to catch up with the annual target in the second half of the year.

Profit forecast: We expect the company to achieve revenue of 3.465, 3.968, and 4.528 billion yuan in 2024-2026, and achieve net profit to mother of 0.519, 0.595, 0.679 billion yuan, and corresponding EPS of 0.49, 0.56, and 0.64 yuan/share.

Risk warning: 1) Risk of rising raw material prices: There are many types of raw materials involved in complex products. If the price of some raw materials rises above expectations, it will put a lot of pressure on the company's profits; 2) Increased industry competition: the industry competition pattern is scattered, and there are many market participants. If competition within the industry intensifies, it will adversely affect the company's operations; 3) New product performance falls short of expectations: The company needs to shape brand momentum and improve operating efficiency. If the market performance of the company's new products falls short of expectations, the new pace of promotion will be affected. Subsequent growth on the company's performance side has an impact; 4) Food safety risks: The company's products are mainly used for cooking, and if a related food safety incident occurs, it will have a major impact on the company's operations.