Incidents:

The company released its 2024 three-quarter report. In the first three quarters, it achieved operating income of 0.839 billion yuan, a year-on-year increase of 14.21%, net profit to mother of 0.149 billion yuan, an increase of 6.57% year-on-year, and net profit of 0.145 billion yuan after deducting non-return net profit of 0.145 billion yuan, a year-on-year increase of 10.51%. Among them, Q3 revenue was 0.301 billion yuan, up 9.57% year on year, net profit to mother was 0.049 billion yuan, down 2.97% year on year, after deducting non-return net profit of 0.047 billion yuan, up 0.14% year on year. The results were slightly lower than our previous expectations.

Investment summary:

Gross margin declined slightly yoy/month-on-month in the third quarter, sales expenses decreased year-over-year/month-on-month, and net profit margin to mother declined year-over-year/month-on-month in the third quarter. The company's 24Q3 gross margin was 40.94%, down 2.22/2.05 percentage points year over quarter, respectively. The main influencing factors are expected to be the same or recovery in production costs for some raw materials in the 3rd quarter, the upward trend or continuation of shiitake mushroom prices in the first half of the year. Furthermore, sales and product structure may also have an impact on gross margin. The 24Q3 sales expense ratio decreased by 0.75/0.38 percentage points year over year, the 24Q3 management cost rate/R&D cost rate/financial cost ratio decreased by 0.19/ decreased 0.06/0.74 percentage points year over year, and the company's 24Q3 net profit margin decreased 2.10 percentage points year on year and 2.46 percentage points from month on month to month 24Q2. Net profit after deducting non-return to mother increased 0.14% year on year in 24Q3. The year-on-year decline in the company's non-recurring profit and loss was mainly due to the year-on-year decrease in revenue from government subsidies and entrusted financial management.

Major sauce products continue to be promoted, and there is plenty of room for expansion of online and B-side channels. The company is a representative brand of shiitake mushroom sauce. Zhongjing Shiitake Mushroom Sauce and Zhongjing Shanghai Scallion Oil are category pioneers and market leaders. Zhongjing Garlic Sauce is a new product launched this year. The company focuses on product innovation and continuously supplements the product matrix. Each product has good potential for growth, and the volume can be expected after product cultivation. The company achieved steady growth despite overall inventory removal and worsening competition in the condiment industry. In the first half of the year, seasoning food revenue increased 17.89% year-on-year, and the company has a good ability to develop products and continue to create demand in segmented fields. At the same time, in addition to traditional strong markets and main sales channels, the company still has plenty of room to penetrate regional markets and channels. The company has formed a “retail channel+industrial channel+e-commerce channel+catering channel” sales matrix. This year, the company further strengthened its basic sales work and moved more towards fresh stores, convenience stores, and farmers' markets closer to consumers' lives, and the number and quality of offline terminal outlets was improved. The company's e-commerce channel revenue increased 87.61% year-on-year in the first half of the year, and the share of e-commerce channel revenue increased to 22.31%. E-commerce content dissemination and live streaming sales were more conducive to the promotion of new products, and the company's channel management experience gradually improved. The company has set up a catering channel team, and at the same time expanded large packaging products, expanded to markets outside key regions of Henan, and had more space for e-commerce catering sales.

It is recommended to focus on opportunities for economic support and consumer promotion policies to drive demand recovery and valuation repair for condiments. In the past, due to inventory removal from overall channels and increased competition in the flavoring food industry, cost investment increased, and corporate performance and valuation expectations were revised downward. Recently, macroeconomic policies have been intensively introduced to support the economy, which is expected to drive a recovery in demand for condiments. The company's advantages in large single products are still quite obvious, and product and channel expansion is more flexible in contributing to performance. The pace of cultivation of large single products and the development of channels outside the province is good. Regional channels are sinking, e-commerce and B-side contribution channels are increasing, and the complementarity of flavoring food and seasoning ingredient products is expected to drive the company's steady growth during the year.

Investment advice: The company's revenue for 2024-2026 is expected to be 1.124, 1.264, and 1.427 billion yuan, respectively, and net profit due to mother is 0.185 billion yuan, 0.211 billion yuan, and 244 million yuan, respectively. Earnings per share are 1.85 yuan, 2.11 yuan, and 2.44 yuan, respectively. The corresponding PE is 15.55X, 13.63X and 11.76X, respectively, to maintain a “buy” rating.

Risk warning: Homogenized competition in the market increases the risk, the risk of changes in the prices of major raw materials, and the risk of market expectations for new product development