Incident: The company released its 2024 three-quarter report. With 24Q1-3, the company achieved operating income of 89.039 billion yuan, -8.59%; net profit to mother of 10.869 billion yuan, +15.87% year-on-year; realized net profit of 8.509 billion yuan without return to mother, +4.55% year-on-year. Among them, 24Q3 achieved operating income of 29.125 billion yuan, -6.67% year over year; net profit to mother of 3.337 billion yuan, +8.53% year over year; realized net profit of 3.184 billion yuan without return to mother, +19.86% year over year.

Comment:

Revenue recovered month-on-month, and milk powder continued to grow. After the Q2 liquid milk delivery pace was adjusted and channel inventory was cleared, the company's revenue recovered as scheduled in Q3 and the year-on-year decline narrowed. By category, the Q3 liquid milk, milk powder, dairy products, and cold drink product lines recorded revenue of 20.637 billion yuan, 6.821 billion yuan, and 1,022 billion yuan, respectively, compared with -10.31%, +6.56%, and -16.61% compared with the same period last year. Among them, milk powder performed well, continuing its upward trend in the first half of the year.

Gross margin increased, depreciation contracted, and profit performance was excellent. On the gross margin side, the Q3 company recorded a gross margin of 35.05%, +2.47pct year-on-year. Considering that the average price of raw milk in Q3 was -14.9% year-on-year and -5.5% month-on-month. At the same time, the year-on-year decline in retail milk prices in Q3 was narrower than in the previous two quarters, we speculate that the decline in raw milk prices and the narrowing of the retail price of products led to a significant increase in gross margin.

On the expense ratio side, the sales expense ratio may have been +1.08pct year over year due to the fact that channel inventory was still being cleaned up in July. The management cost rate, R&D cost rate, and financial cost ratio were -0.38pct, +0.07pct, and -0.50pct, respectively. The overall cost rate declined steadily. Furthermore, the company's share of asset and credit impairment losses in the current period was stable, -0.36 pct and +0.53 pct, respectively, year-on-year. Combined with the decrease in the share of non-operating expenses in the current quarter (mainly donation expenses in the same period last year, -0.86pct year on year), the Q3 company's net profit margin reached 11.41%, +1.62 pct year on year, and profit performance exceeded market expectations.

The operation continues to be excellent, and all categories of business rank first. While the company achieved growth that exceeded expectations in Q3, liquid milk steadily ranked first in the industry, and Jindian organic milk performed strongly; overall sales of milk powder ranked first in the Chinese market, and multi-category products won in all channels; cold drinks ranked first in the industry for 29 consecutive years, and the cheese market share continued to expand.

Profit forecasting and investment ratings: Revenue began to recover month-on-month to seize market changes. The company took the initiative to adjust channels in Q2, and the revenue side recovered significantly in Q3. Along with the gradual narrowing of the decline in milk terminal prices and raw milk prices, we believe that the dairy market is expected to usher in a substantial turnaround next year, and the company's performance is also expected to gradually recover. We expect the company's 2024-2026 EPS to be 1.87/1.70/1.89 yuan, corresponding to 2024-2026 15X/16X/15X PE respectively, maintaining the company's “buy” rating.

Risk factors: food safety issues, increased industry competition