Incident: The company released its 2024 semi-annual report. 24H1 revenue was 12.714 billion yuan, down 10.08% year on year; net profit to mother was 0.28 billion yuan, down 17.03% year on year; net profit after deducting non-return to mother was 0.348 billion yuan, up 10.05% year on year. Corresponding to 24Q2 operating income of 6.297 billion yuan, a year-on-year decrease of 10.92%; net profit to mother was 0.108 billion yuan, a year-on-year decrease of 28.19%; net profit after deducting non-return to mother was 0.163 billion yuan, an increase of 14.78% year-on-year.

Revenue was under pressure in the first half of the year, and the base camp moat was relatively stable. 1) By product: 24H1 liquid milk/other dairy products/animal husbandry products/other revenue was 72.31/4.092/0.6/0.749 billion yuan, respectively, -9.67%/-2.33%/-42.99%/-7.49%. Overall domestic demand for dairy products faced pressure in the first half of the year, and the company's revenue for liquid milk and other dairy products declined year on year; revenue from animal husbandry products declined significantly, mainly due to market conditions, and feed business revenue declined. 2) By region: 24H1 Shanghai/ Overseas/ Overseas revenue was 3.748/5.063/3.861 billion yuan respectively, -5.75%/-19.87%/+2.63% YoY. The company built a relatively stable moat at its base in Shanghai, and the decline in revenue in Shanghai was less than in the field. 3) Channel division: 24H1 direct operation/distribution revenue was 2.787/9.794 billion yuan, respectively, -14.93%/-8.32% YoY. In terms of the number of dealers, as of the end of 24H1, there were 494/3797 in Shanghai/overseas respectively, and +33/- 145 at the end of 23, respectively.

Net interest rates without return to mother increased year over year. 24H1's gross margin was 19.83%, -0.29pct year on year, and gross margin declined slightly year on year. It is expected that in the first half of the year, against the backdrop of sluggish industry demand, the company's product promotion efforts will expand. 24H1's sales/management/R&D/finance expenses ratio was 11.69%/3.67%/0.35%/1.00%, respectively, -0.48/+0.30/+0.07/+0.23pct. 24H1's net interest rate to mother was 2.21%, -0.18pct year on year, 24H1 net profit margin of 2.74% after deducting non-return to mother, and +0.50pct year on year.

Deeply cultivate the Xianling strategy and promote channel sinking. In terms of products, the company is deeply involved in the “leading fresh” strategy. In the fresh milk sector, the company continues to improve the high-end fresh milk position of the premium fresh milk brand, and the waist continues to consolidate the leading position of the Youbei fresh milk brand and accelerate the market penetration of basic fresh milk; in the fresh yogurt sector, realistic, excellent, and basic yogurt continues to improve its product strength. At the same time, the company insisted on product innovation and continuously met consumer needs. In the first half of the year, the company launched 34 new products, including Guangming Youbei Organic Fresh Milk and Zhiyou Native DHA. In terms of channels, the company is continuously strengthening channel and network construction, promoting channel expansion and network sinking. The regional layout emphasizes penetrating Shanghai and implementing East China; on the basis of stabilizing traditional channels, the company actively explores emerging channels, increases e-commerce channel layout and construction, and creates corresponding growth strategies for different types of e-commerce platforms. The company's subsequent operational improvements are worth looking forward to.

Investment advice: According to the company's operating conditions in the first half of 2024, we adjusted the profit forecast. We expect the company's net profit to be 0.48 billion yuan, 0.54 billion yuan, and 0.6 billion yuan respectively in 2024, 2025, and 2026, respectively, -50%, 12%, and 12%, respectively. The PE corresponding to the current stock price is 21, 19, and 17 times, respectively. Maintain an increase in holdings rating.

Risk warning: macroeconomic fluctuation risk, food safety risk.