Matters:

The company released its three-quarter report for 2024. In the first three quarters, it achieved operating income of 3.946 billion yuan, -0.17% year-on-year; net profit to mother was 0.576 billion yuan, turning a loss into a profit. Q3 achieved revenue of 1.328 billion yuan, +2.23% year over year; net profit to mother of 0.226 billion yuan, +32.90% year over year.

Commentary:

Delicious food improved marginally, but during the period, the company placed more emphasis on natural sales, and the revenue growth rate was slightly lower than expected. The 24Q3 company achieved revenue of 1.33 billion, +2.2% year on year, of which Delicious Fresh revenue was 1.25 billion, +2.6% year on year, achieving a slight improvement. By product, soy sauce was +0.5% year over year, with a significant margin improvement over Q2. Chicken essence and chicken powder were +14.0% year over year, contributing the main source of growth, while cooking oil is expected to be affected by the pace of delivery, and revenue is -9.2% year over year. By channel, revenue from the 24Q3 distribution/direct sales model was -0.9%/+22.6%, respectively. Among them, direct sales continued to grow rapidly, driven by customized business. In terms of subregions, with the exception of the central and western regions, which are still declining, the East/South/North all achieved year-on-year correction, +8.6%/+1.2%/+2.5%, respectively. In addition, the number of the company's 24Q3 dealers increased net by 110 to 2,395, with 13 fewer in the southern region and 14/86/23 in the East/North/Midwest.

Reflected in cost dividends, combined with optimized fee management and control, the 24Q3 company's profit performance exceeded expectations. The company recorded a gross margin of 38.8% in 24Q3, +5.0 pcts. Among them, the gross margin of Delicious Fresh was 38.1%, +4.9 pcts year over year. The main reason was the decline in material purchase unit prices, production costs, and logistics costs. The second was driven by product structure optimization and price increases for some individual products. On the cost side, the 24Q3 company's sales expense ratio was 6.3%, -1.9 pcts year over year, and -8.5 pcts month-on-month. The company drew on Q2 experience in the middle of the year to focus on optimizing the cost efficiency ratio, and the Q3 report showed that the increase in quality and efficiency was already reflected. The 24Q3 management expense ratio was +1.1% year-on-year, mainly due to an increase in compensation and benefits, depreciation and amortization, machine material consumption, and equity incentive waiting period expenses. Other financial/R&D expenses ratio was +0.2/-0.7 pcts year over year. In the end, Single Q3 Company achieved a net profit margin of 17.1%, exceeding previous expectations, while Delicious Fresh Returns had a net profit margin of 18.4%, +4.4pcts year over year.

Improvements were made gradually in the second half of the year. After learning from experience and deepening reforms in the coming year, operations are expected to return to a better pace. In the face of adversity, reforms have inevitably had their ups and downs. More importantly, the company has faced business problems. Since mid-year, the company has been properly slowing down and adjusting the pace, holding business enablement training meetings, channel construction summary and exchange meetings during Q3 to systematically correct and optimize some strategies. On the other hand, it focuses on maintaining the basic stock market, reducing pressure on dealer inventory, and at the same time improving the pricing mechanism and sorting out the channel value chain to reduce regional trading. In our previous review, we suggested that the company is determined to realistically adjust, and that the company's business status is expected to recover in the second half of the year. In Q4, considering last year's low base and gradual adjustment run-in, the report is expected to achieve higher flexibility. In the coming year, the company will fully absorb this year's lessons, and make more reasonable arrangements in strategy formulation, personnel arrangements, channel planning, etc., and the state of the enterprise is expected to gradually enter a positive cycle.

Investment advice: Actively correct, return to the upward trend, and maintain a “strong” rating. The company firmly believes in reform, optimizes and adjusts the pace. The Q3 business situation recovered marginally, and some improvements in quality and efficiency were revealed. Along with team run-ins and strategic corrections, the company's operations are expected to continue to improve in the coming year, and revenue will return to a reasonable growth center, while the profit side is expected to further release flexibility after efficiency is improved and minority shareholders' rights are recovered. Considering land expropriation contributions, the Shenzhen-China Railway compensation is included in the 24-year report, and compensation such as sandwich land is spread evenly from the end of October '24 to the end of '25. At the same time, we adjusted the 24-26 EPS forecast to 1.41/1.96/1.36 yuan (the original forecast was 1.36/2.03/1.48 yuan), which corresponds to the P/E valuation 17/12/18 times. After deducting land compensation, the estimated revenue for 24/25 is 5.34/6 billion, and the profit due to mother is 0.77/0.9 billion, respectively. We will give 25 times PE in 25 years, plus a real estate valuation of about 2 billion, maintain a target market value/target price of about 24.5 billion/31.35 yuan, maintaining a “strong” rating.

Risk warning: Downstream demand is sluggish; market competition is intensifying; investment in the early stages of reform is increasing; nationalization expansion, catering channel development, etc. fall short of expectations; progress in the divestment of non-main businesses falls short of expectations; food safety issues, etc.