Incident: The company released its 2024 mid-year report. In 2024H1, the company achieved revenue of 1.179 billion yuan, net profit to mother -0.03 billion yuan, +33.02% year-on-year, after deducting non-net profit of -0.043 billion yuan, +46.23% year-on-year; of these, Q2 achieved revenue of 0.454 billion yuan, -7.54% year-on-year, net profit to mother -0.055 billion yuan, net profit of -0.063 billion yuan. billion yuan, +14.11% compared to the same period last year.

The off-season inventory of the brewing business dragged down overall performance, and offline ready drinks continued to increase steadily. By product, Q2 brewing and instant drinking achieved revenue of 0.129/0.313 billion yuan, respectively. The Q2 brewing season was dominated by inventory adjustments and continued product innovation and upgrades. It is expected that new and upgraded products will drive overall growth before the peak season. In terms of ready-to-drink, the company used Meco as its strategic focus to achieve a differentiated breakthrough. The slight decline in Q2 instant drinking performance is expected to be related to costs being skewed more offline, the impact on online sales, and the repositioning of milk tea products. Q2 e-commerce revenue fell 50.1% year-on-year, while the offline ready-to-drink sector is still expected to perform well. Looking at the subregions, the company's East China/North China market grew by 2.4%/11.0% year on year. The East China market, the main sales area, performed well. At the same time, the North China region, which includes Beijing, achieved good performance under active promotion by the company. The rest of the regions declined to varying degrees.

Gross margin continued to rise, but investment in product innovation increased, and the improvement in profit levels in Q2 was not obvious. 2024H1's gross margin was +2.69 pct to 30.58% year over year, of which Q2 gross margin was +2.13 pct year over year to 25.71%. The increase in gross margin is expected to be related to an increase in scale effects and a decrease in the prices of raw materials such as large bags of powder and grafting powder. In terms of expenses, Q2 sales/management/R&D/finance cost rates were 35.6%/11.9%/2.5%/-5.3%, respectively, compared to -1.7/+1.2/+0.7/-1.0pct, respectively. The sales cost rate decreased due to the contraction of advertising expenses and online expenses. At the same time, the increase in management expenses was mainly due to the amortization of equity incentive costs. Q2 accelerated R&D efforts for new brewed and light fruit tea products, and the R&D cost rate also increased. Overall, Q2 net margin was -1.9pct to -12.0% year over year.

The pace of product innovation accelerates, and actively adjusts before starting. Looking ahead to the second half of the year, the company's brewing business is expected to return to positive growth through product innovation and intensive cultivation at high-potential outlets. The net interest rate of the brewing business remains above 16% all year round. It is a relatively stable cash flow business and can provide solid support for the development of new products. In the first half of the year, the company readjusted its internal team and collaborated and integrated the original brewing team with the ready-to-drink sales team for some markets and channels to achieve strategic resource focus. At the same time, the company is repositioning and adjusting ready-to-drink products, and is actively promoting channels such as restaurants, snack mass vending machines, etc. In the future, it will continue to strengthen the model market through network expansion and increased marketing to prepare for subsequent nationwide expansion. It is expected that ready-to-drink revenue will continue to grow steadily. Furthermore, the sales scale of the ready-to-drink business gradually increased this year, driving an upward recovery in the utilization rate of production capacity. Profits in the ready-to-drink business are expected to steadily reduce losses, and I am optimistic that the profit level will gradually increase.

Profit forecast: Considering that overall demand is weak and industry competition is fierce, we lowered our 2024-2026 profit forecast. We expect the company to achieve revenue of 3.878/4.241/4.709 billion yuan in 2024-2026, up 7%/9%/11% year on year, and achieve profit 0.307/0.349/0.411 billion yuan, up 30%/24%/19% year on year, corresponding PE is 23/20/17X.

We gave 25 times PE based on our 2024 results, with a target price of 18.75 yuan for one year, maintaining a “buy” rating.

Risk warning: Food safety risks; increased industry competition; risk of rising raw material costs; sales falling short of expectations during the peak ready-to-drink season; changes in internal management adjustments; and network development falling short of expectations.