Core views

The price of the company's raw materials, duck, and side has gradually declined month-on-month. The company's gross margin has begun to improve, and profit flexibility was greatly reflected on the reporting side in 2024. Liao Ji's polished store model has already been rolled out, actively laying out the second growth curve for braised dishes. We believe that the time when the company's cost pressure is greatest has passed. The company has a leading edge in the casual brine industry, has a complete franchisee system, and has outstanding supply chain management capabilities. The company's single-store revenue is expected to gradually improve in the future as consumption recovers.

occurrences

Delicious Foods Releases 2024 Interim Report

In the first half of the year, the company achieved revenue of 3.34 billion yuan, -9.73% year-on-year, realized net profit of 0.296 billion yuan, +22.20% year-on-year, and realized deduction of non-net profit of 0.281 billion yuan, or +24.15% year-on-year. Among them, in the second quarter, the company achieved revenue of 1.644 billion yuan, -12.35% year-on-year; realized net profit to mother of 0.131 billion yuan, +25.08% year-on-year, and realized deduction of non-net profit of 0.125 billion yuan, or 36.63% year-on-year. The company announced that it plans to pay an interim dividend, with a cash dividend of 0.30 yuan (tax included) per share.

Brief review

The company focuses on improving the quality of stores. From quantitative increase to quality increase, the company reported that the total number of stores was 14,969 as of the semi-annual report, a net decrease of 981 from 15,950 at the end of 2023. Since the beginning of this year, the company has focused on improving the quality of single-store operations. In the first half of the year, it closed some inefficient stores, strengthened support for franchisees, and assisted a series of activities and promotions, as well as Meituan, Douyin, and private domain membership systems to increase single-store revenue.

In terms of products, Q2 halogen product sales/franchisee management/other business revenue was 1.4/0.02/0.19 billion yuan, respectively, or -9.8%/-27.1%/-26.2%, respectively. Among them, among brine products, fresh goods revenue was -15.2%, poultry, livestock, vegetables and other products were -16.4%/+90.9%/-9.6%/-17.4%, respectively, and packaged products were +111.1% year-on-year.

Costs fell as scheduled, and gross margin increased

Duck raw materials declined as scheduled, driving Q2 gross margin up 8.21pcts year-on-year to 30.55%, and H1 gross margin of 30.29%. The company's sales/management/R&D expenses in the first half of the year were +1.83pcts/+0.06pcts/+0.11pcts, respectively. The increase in sales expenses was mainly due to the increase in consulting expenses due to the company's hiring of an external consulting team, as well as an increase in advertising expenses for brands and products. Net profit margins for the first half of the year were +2.31pcts year-on-year to 8.51%, respectively.

Improve the capacity utilization rate of existing plants, continuously optimize internal operations, improve the capacity utilization rate of existing plants, and treat investment and expansion with caution. It is not expected that there will be a significant increase in heavy assets. In 2024, the company changed from an assessment that focused on increasing the number of stores in the past to focusing on improving the quality and operation of stores, optimizing the structure at the store level, increasing the proportion of high-quality stores, and continuing to increase the development of high-potential stores. The company continues to attract consumers to the store through Douyin group purchases, private membership operations, brand promotion, and joint IPs, etc., to increase the turnover of a single store. Improved internal management efficiency, improved open source savings and operation.

Profit forecast: We believe that the time when the company's cost pressure is greatest has passed, and the operation is expected to gradually improve. In the future, the company is expected to launch more products and supporting activities to attract consumers. Considering the external consumption environment, we lowered our forecast. We expect the company's revenue for 2024-2026 to be 6.823/6.934/7.495 billion yuan, respectively, maintaining a “buy” rating.

Risk warning: 1. Industry competition has intensified: Although the company is currently the industry leader, other companies in the industry, such as Zhou Heiya and Huangshanghuang, also have a large number of stores. They also have the ability to expand across regions, and the overall market concentration is still low. If external capital enters and invests in the expansion of local small and medium-sized chain brands, it will adversely affect the expansion of the company's new stores. 2. Food quality control: The company's products involve various aspects such as procurement, production, transportation, store sales, etc., and every step must strictly ensure safety. Especially at the store level, since the company's products are sold in bulk, problems such as bacterial contamination and temporary product sales are likely to occur, so the company needs to strengthen management to prevent food quality problems. 3. Opening a store falls short of expectations: If Tier 1 capital supports the rise and opening of new brands, it will affect the confidence and enthusiasm of franchisees and have a negative impact on the company's opening of stores. 4. On August 15, the company received the “Notice of Case Filing” issued by the China Securities Regulatory Commission. On June 7, 2024, the China Securities Regulatory Commission decided to file a case against the company due to suspected illegal disclosure of information.