Event: Company discloses 2024 interim results announcement. The company 24H1 achieved total revenue of 11.379 billion yuan (YOY -8.9%), main operating income of 11.335 billion yuan (YOY -9.00%), and net profit to mother of 0.565 billion yuan (YOY -5.89%).

Weak demand+rising aluminum prices affect revenue & gross profit, and active cost optimization ensures steady improvement in profitability. In the first half of '24, the company's main business revenue fell 9.00% year on year to 11.335 billion yuan (of which 24H1 sales volume fell 15.7%), mainly due to the recovery in overall demand for the soft drink category. Due to the sharp rise in international and domestic aluminum prices, the purchase price of cans was higher than in the same period last year, so gross margin decreased by 0.91 pct to 34.56% year on year, resulting in a year-on-year decline of 11.33% to 3.918 billion yuan. On the cost side, the company's management actively implemented a series of optimization and integration measures to improve efficiency, so the cost ratio for the period decreased by 1.84 pct year over year (of which the sales expense ratio was -1.84 pct year over year, the management expense ratio was -0.01pct year over year, and the financial expense ratio was +0.01pct year over year). Furthermore, in the first half of '24, the company's other net operating income decreased by about 0.089 billion yuan (mainly 23H1 company recorded a one-time asset sale income of 91.61 million yuan), and the income tax rate increased by 0.53 pct to 23.93% year on year. As a result, net profit to mother fell only 5.89% year on year to 0.565 billion yuan (corresponding net profit to mother increased by 0.16 pct to 4.99% year on year).

The market share of core products continues to be stable, ASP maintains an upward trend, and the product portfolio continues to be optimized. In 2024, the company uses “reshaping” as its work theme to achieve better customer experience, better operational efficiency and higher profitability through product rebranding, marketing network reshaping, value chain reshaping, supply system reshaping, organizational restructuring, and executive culture reshaping. Although both revenue amount and sales volume have declined, the overall ASP has maintained an upward trend, reflecting the optimization and adjustment of a higher quality product portfolio. Looking at the performance by item:

(1) Soft drink category: Affected by the decline in demand for soft drink categories in the franchise area, 24H1's soft drink category revenue fell 7.83% year on year to 8.577 billion yuan. However, in the first half of the year, the market share of the soft drink category in the company's business area remained above 50%, continuing to be ahead of major competitors. In addition, the company is also speeding up the completion of packaging for sugar-free products, and the share of sugar-free revenue increased year-on-year in the first half of the year.

(2) Juice category: 24H1's juice category revenue fell 14.00% year on year to 1.661 billion yuan.

Furthermore, considering that the revenue of juice products of Master Kong Holdings also fell 10.1% in the first half of the year, it is judged that the overall development of the juice industry was under pressure in the first half of the year. In the first half of the year, the “Meijuyuan” brand launched a new visual system, introduced unified brand strategy, visual recognition and consumer activities, and established a closer connection with consumers.

(3) Water category: 24H1's revenue in the water category was under heavy year-on-year pressure, falling 32.3% to 0.532 billion yuan. We judge that this may be related to the intense price war in the packaged water industry. In the first half of the year, the company's own water brand “Yuehuo” launched “LOHAS Natural Soda”, which has already sold tens of thousands of products in just a few months. In the second half of the year, we will continue to enrich the packaging structure for water categories, broaden drinking scenarios, and strengthen healthy drinking water communication. In the future, we will maintain the strategy of promoting the transformation and upgrading of the water category, focusing on promoting the mainstream water brand “Pure Yue” products, and at the same time actively developing the strategy of high-end aquatic products, hoping to enhance the profitability of the water category and drive overall profits.

(4) Other products: 24H1's other products achieved relatively rapid growth, with a year-on-year increase of 30.55% to 0.564 billion yuan. Among them, ready-to-drink coffee revenue in the first half of the year showed a double-digit year-on-year increase, and the results were satisfactory; while energy drinks launched a new brand of “Beast Hunting” energy drinks. The products are packaged in plastic bottles and do not contain steam, which is more in line with the drinking needs of target customers.

Looking ahead to the second half of the year, the prices of major raw materials are expected to remain stable. The company will continue to actively promote key strategies such as product structure upgrading and business portfolio optimization to improve gross profit margins, further enhance overall profit margins, and promote the achievement of “high-quality and sustainable” development goals.

Smart Retail & COFCO Delight's innovative business is developing rapidly and continues to help the company move towards its vision of a world-class food and beverage group. In the first half of '24, the scale of the company's smart retail business (number of devices) was further expanded, and the number of devices stabilized at the top of the industry. It achieved a nationwide layout of 31 provinces, covering more than 280 cities, and maintained rapid year-on-year revenue growth. In the future, in addition to continuing to expand its business scale, the company will also actively diversify its product range and continue to build a profitability advantage based on its existing scale advantages. In addition, the revenue of the company's innovative business “COFCO Enjoy Club” also increased year-on-year in the first half of the year, and gross margin continued to improve. Among them, the D2C business more than doubled. We believe that the continued enrichment and growth of the company's retail innovation business in the future will help the company further advance its vision of a world-class food and beverage group.

Profit forecasting and investment advice.

(1) In the soft drink business, its revenue was CAGR = 6.93% in 18-23, maintaining steady growth, but 24H1 fell 7.83%. Considering the benefits of early Q4 sales next year and the current high temperatures in July/August, the 24H2 sales trend is expected to improve, and a revenue growth forecast of -4% for the full year of 24. In addition, referring to historical growth centers, considering future economic consumption recovery and the low 24-year relative base, the business's revenue growth forecast of 5%/4% for 25-26 years is given.

(2) In terms of the juice business, its revenue was CAGR = 8.46% in 18-23, maintaining steady growth, but 24H1 declined by 14.00%. Also considering the benefits of early Q4 sales during the Lunar New Year next year, it is expected that the 24H2 sales trend will improve, and a revenue growth forecast of -5% for the whole of '24. In addition, referring to the historical rapid growth center, considering the future economic consumption recovery and the low 24-year relative base, the business was given a revenue growth forecast of 6%/5% for 25-26.

(3) In terms of the water category business, its revenue was 18-23 CAGR = -1.13%, the basic revenue scale remained at 1.2-1.3 billion, and 24H1 fell 32.30%. Considering the current fierce price war in the packaged water industry and the weak performance of the company's water category business in the past, the business was given a revenue growth forecast of -30%/0%/0% for 24-26 years.

(4) In terms of other business, its revenue in 18-23 was CAGR = 6.51%, but 24H1 performed well, with a year-on-year increase of 30.55%. Considering the good racetrack boom of coffee and energy drinks, the business was given a revenue growth forecast of 30%/25%/20% over 24-26.

(5) In terms of gross margin, 24H1 gross margin fell 0.91 pct year on year. However, considering the current decline in raw material prices such as sugar prices and improved revenue performance in the second half of the year, a gross margin forecast of 34.50% for the full year of 24 (0.68 pct less than 23) was given. In addition, considering the economies of scale brought about by revenue recovery in 25/26, a gross margin forecast of 35.00%/35.50% for 25/26 was given.

We expect the company's total revenue for 2024-2026 to be 20.584/21.813/22.897 billion yuan, net profit to mother of 0.838/0.932/1.04 billion yuan, respectively, and corresponding EPS of 0.30/0.33/0.37 yuan/share, respectively. Referring to the PE valuation of comparable companies, we gave the company a PE (2024E) valuation range of 11-14 times, corresponding to a value range of 3.30-4.20 yuan/share, based on the HKD/RMB 0.91 exchange rate, corresponding to a reasonable value range of HK$3.63-4.62 per share, covering and giving a “superior to market” rating for the first time.

Risk warning. (1) Fierce market competition, (2) fluctuating raw material costs, (3) product quality and safety issues, and (4) failure to acquire new users or retain existing customers.