Incidents:

On August 30, 2024, Tianwei Foods released its 2024 semi-annual report. The first half of 2024 achieved operating income of 1.468 billion yuan, an increase of 2.95% year on year; achieved net profit of 0.247 billion yuan, up 18.79% year on year; realized net profit after deduction of 0.21 billion yuan, up 17.68% year on year; achieved revenue of 0.614 billion yuan in a single quarter, -6.80% year on year; realized net profit to mother 0.071 billion yuan, -10.90% year on year; realized deducted non-net profit 0.063 2024Q2 billion yuan, +6.07% year over year

Investment highlights:

Demand in the off-season is under pressure, and Chinese condiments are growing steadily. On the product side, 2024Q2 Hot Pot Seasoning/Chinese Seasoning/Other Products achieved revenue of 0.198/0.392/0.024 billion yuan respectively, or -22.94%/4.75%/-12.17%, respectively. Q2 Against the backdrop of weak overall consumption, the company's Chinese seasoning still achieved steady growth. In addition to the effects of food extracts, we expect new products and crayfish seasoning to be boosted. Since Q2, the country's food and beverage revenue growth has been weak, compounding the low season for hot pot consumption, putting some pressure on the hot pot base. On the channel side, 2024Q2 offline and online channels each achieved revenue of 0.492/0.122 billion yuan, or -15.32%/57.37%, respectively. The company honed its internal skills during the off-season, and the distribution channel continued to promote “excellent business support”. As of 2024 H1, the number of dealers nationwide was dynamically optimized to 3,150, a decrease of 15 from the beginning of 2024.

Online has maintained rapid growth. On the one hand, it has benefited from the combination of food products. On the other hand, the company focuses on online business development, establishing four major online business segments. The retail division and the new retail division work together to focus on online business. Looking at the subregions, the eastern, southern, western, northern, and central parts of 2024Q2 achieved revenue of 1.38/0.63/0.216/0.042/0.156 billion yuan respectively. The western base market performance was steady, and other regions were under pressure.

Gross margin continued to rise due to multi-factor contributions. 2024Q2 has a gross profit margin of 33.33%, compared to +2.2 pct. We believe that there are three main reasons: 1) the price of main raw materials is still low; 2) the product structure has been upgraded, and the proportion of high-margin Chinese food seasonings has increased. At the same time, the company has improved product quality and taste in all aspects around a healthy strategy, which is expected to boost gross margin; 3) food extracts with strong profitability still have a partial merger effect. 2024Q2's sales/management/finance expense ratios were 10.7%/6.85%/-0.29%, respectively, compared with -0.72/-1.39/+0.28pct, respectively, with a significant increase in cost efficiency. 2024Q2 investment income was -59% YoY to 0.012 billion yuan. Net interest rate to mother and net interest rate after deducting non-return to mother recorded 11.53%/10.26%, respectively, -0.53/+1.24pct year-on-year, respectively.

Product upgrades go hand in hand with channel optimization, and focus on peak season demand. The company's product side anchors the trend of health and continuous upgrading to meet consumers' demand for higher quality, and the product family has achieved increased quality. In terms of channels, the company consolidates its C-side advantage and continues to optimize channel efficiency under the steady promotion of the “Excellent Business Support” policy. At the same time, it is expected to empower offline B-side development in the future and achieve resource and business collaboration with Food Extract in various aspects such as production, products, and channels. Currently, the polymodulation industry is still scattered, but industry development is gradually returning to rationality. Future leaders are expected to accelerate integration with advantages of scale and efficiency. The peak season for hot pot base, sausage and bacon seasoning is coming soon in the second half of the year, and the company's business performance is expected to recover.

Profit forecast and investment rating: Considering that consumer demand has been under pressure since 2024Q2, we slightly lowered the company's profit forecast. We expect the company to achieve revenue of 3.5/3.9/4.3 billion yuan in 2024-2026, +10%/12%/11%; net profit to mother is 0.528/0.605/0.676 billion yuan, +16%/14%/12%, respectively, corresponding EPS is 0.50/0.57/0.63 yuan, corresponding PE is 21X/18X/ 16X, however, the company has a rich product matrix, and has a good foundation and brand recognition on the C-side. In recent years, it has used its R&D advantages to boost the B-side. In 2023, it is expected that the B-side will accelerate development through the acquisition of food ingredients, and the B-side is expected to accelerate development in the future, so it maintains a “gain” rating.

Risk warning: 1) The company's B-side development falls short of expectations; 2) C-side demand recovery falls short of expectations; 3) raw material costs are rising too fast; 4) promotion of new products falls short of expectations; 5) food safety risks; 6) uncertainty about the repurchase process.