Incident: The company released its 2024 semi-annual report. 2024H1 achieved revenue of 22.17 billion yuan, +8.4% year over year, and realized net profit to mother of 6.24 billion yuan, +8.1% year over year.
The performance of purified water from the green bottle was outstanding. The share of repackaged water declined, and unsweetened tea continued to grow at a high rate. By product, 2024H1 packaged water/ tea drinks/energy drinks/juice achieved revenue of 85.3/8.43/2.55/2.11 billion yuan, respectively, compared to -18.3%/59.5%/3.8%/25.4%, respectively. The penetration rate of Oriental leaves increased, and the performance of large packaged products was impressive, driving tea drinks to maintain high growth; packaged water was affected by public opinion events, and red bottles are expected to drag down overall performance. Q2 launched cost-effective green bottles of pure water to make up for some of the decline in sales; the juice category is expected to grow faster than overall. There is good feedback on the C100 launch. At the same time, consumer acceptance of healthy and natural juices is gradually increasing, and NFC series products are also expected to perform well.
H1 promotions have been strengthened, and the overall profit level is stable. 2024H1's gross margin of -1.38 pct year-on-year was 58.78%. It is expected to be related to the company's increased promotion efforts after the launch of new pure water products, the impact of the decline in overall sales of packaged water on capacity utilization, and the increase in the cost of raw materials for juice. In terms of expenses, 2024H1 sales/management/finance expenses were 22.42%/4.12%/0.18% respectively, which was the same as -0.53/-0.56 pct/, respectively. H1's investment in advertising and promotion expenses increased, but the reduction in logistics rates led to savings in sales expenses. Looking at profit by business, 2024H1 packaged water/ tea drinks/ energy drinks/ juice drinks/ other operating profit margins were -4.2/+1.0/-5.9/+2.1pct, respectively. The decline in operating profit margins for packaged water was mainly due to increased promotion of green bottle purified water and the decline in sales of red bottled water. At the same time, tea drinks benefited from the positive trend of sugar-free tea. The company increased the scale effect, and the operating profit margin of tea drinks increased. Overall, the company's net interest rate was basically the same as the same period last year. The H1 net interest rate was 28.14% (-0.08pct year on year).
Short-term public opinion influence will not change long-term healthy development trends. It is expected that the share of packaged water will gradually rise in the future, and the overall operation will be steady in order to achieve high-quality development. Faced with market opinion and competition, the company launched a new green bottle of pure water in April of this year. The purpose of launching green bottle water is to give consumers more choices and improve the layout of pure water, natural water, and mineral water. Currently, the penetration rate is low, and there is still plenty of room for growth in the future. The current distribution progress and market feedback of green bottle pure water are in line with expectations. At the same time, the company introduced a new 19L of disposable packaged water this year to solve the pain points of recycled bottled water and further improve the layout of large packaged aquatic products.
The company is working to eliminate the impact of public opinion incidents. With the gradual improvement of the packaged aquatic products matrix, the packaged water market share is expected to recover. At the same time, the company launched a new 900ml large package of Oriental Leaves and increased promotional efforts to meet market competition. Tea drinks are expected to continue the rapid growth trend. In terms of profit, considering the intensification of market competition and unabated marketing efforts for packaged water and tea drinks, and the fact that Olympic sponsorship expenses are mainly concentrated in the second half of the year, profit margins are expected to be slightly pressured in the second half of the year. It is expected that the industry will be reshuffled after experiencing price competition, and the concentration will be skewed towards the top. I am optimistic that the company's share of packaged water and tea and beverage racetracks will further increase in the future.
Profit forecast: We expect the company to achieve revenue of 46.209/51.846/58.327 billion yuan in 2024-2026, up 8%/12%/13% year on year, and achieve profit of 1.283/1.432/1.623 billion yuan, up 6%/12%/13% year on year, corresponding PE 19/15/13X.
We gave 28 times PE based on our 2024 results, and our target price for one year was HK$34.70, which gave us a “buy” rating for the first time.
Risk warning: Food safety risks; increased industry competition; weak market demand; new product expansion falls short of expectations; risk of rising raw material costs.