Incident: Three Squirrels released their 2024 mid-year report. 24H1 achieved revenue of 5.075 billion yuan, an increase of 75.39% year on year; net profit to mother 0.29 billion yuan, up 88.57% year on year; net profit after deducting non-return to mother of 0.228 billion yuan, an increase of 211.79% year on year. Among them, 24Q2 achieved revenue of 1.429 billion yuan in a single quarter, an increase of 43.93% over the previous year; net profit loss to mother was 0.019 billion yuan, compared with a loss of 0.038 billion yuan in the same period last year; net profit loss after deducting non-return to mother was 0.035 billion yuan, which was a loss of 0.063 billion yuan for the same period last year.

Overall online growth is positive, and offline distribution layout is being strengthened. By channel, the 24H1 e-commerce platform achieved revenue of 4.09 billion yuan, accounting for 81% of total revenue. Among them, Douyin, Tmall, and JD achieved revenue of 1.224/1.083/0.793 billion yuan respectively, or +180.73%/+28.32%/+20.33% over the same period last year. Under the “Douyin + N” model, integrated e-commerce carried video e-commerce spillover traffic, and 24H1 resumed revenue growth year-on-year. The distribution business 24H1 in offline channels achieved revenue of 0.669 billion yuan, an increase of more than 100% over the previous year. By the end of 24H1, 209 national snack stores had been opened (24H1 opened 60 new ones), and 24H1 achieved revenue of 0.175 billion yuan. The original number of stores was 116, and 24H1 achieved revenue of 0.055 billion yuan. Among them, the distribution business is a key layout direction in 2024. Product-side companies will increase the number of daily sales categories and create more than 100 items suitable for distribution channels, covering various categories such as nuts, baking, fried goods, meat, etc., with a price range of 9.9 yuan. Strengthen partnerships with dealers on the channel side and increase investment on the market side. By product, 24H1 nuts/baking/combined/others achieved revenue of 27.60/0.609/0.934/0.772 billion yuan respectively, or +67.90%/+38.85%/+164.82%/+68.42% compared with the same period last year.

The supply chain layout boosted gross profit margin and increased profitability. In terms of gross profit, 24H1/24Q2 companies' gross margins were 25.85%/21.90%, 24Q2 was +3.24pcts year over year, and -5.50pcts month-on-month. The year-on-year improvement in gross margin was mainly due to the increase in the nut category. Under the source collection and independent manufacturing model, gross margin increased, raising the overall gross margin level. On the cost side, 24H1/24Q2 sales expense rates were 17.62%/21.10%, 24q2 -0.06pcts year-on-year, and +4.84pcts month-on-month. 24H1/24Q2 management fee rates were 1.95%/3.53%, 24Q2 -1.73 pcts year on year, and +2.20 pcts month-on-month. Taken together, 24H1's net interest rate to mother was 5.71%, +0.40pcts year-on-year. As reforms advance, the company's profitability continues to recover. Looking ahead to the whole year, the company will promote supply chain construction and launch the “Wuhu Healthy Snacks Industrial Park” plan. The snack food category controls the upstream production side through investment and holding. The continuous layout of the production side is expected to help the company reduce production costs and enhance the overall competitiveness of products.

Profit forecasting, valuation and ratings: Considering the gradual implementation of the results of the company's reforms, profitability is expected to recover. The 2024-2026 net profit forecast was raised to 0.394/0.56/0.737 billion yuan (up 23.32%/32.84%/41.54% from the previous time). The EPS corresponding to 2024-2026 is 0.98/1.40/1.84 yuan, and the current stock price is 17/12/9 times the corresponding P/E, respectively. The subsequent performance of the company's offline distribution business remains to be seen, and the “gain” rating is maintained.

Risk warning: Traffic entrances have increased, customer acquisition costs have increased beyond expectations, and offline business expansion falls short of expectations.