Incident: The company announced that in the first three quarters of 2024, revenue was 8.15 billion yuan, -0.5% year over year; net profit to mother was 0.47 billion yuan, +24.4% year over year; net profit after deducting non-return to mother was 0.51 billion yuan, +29.5% year over year. Among them, 24Q3 revenue was 2.79 billion yuan, -3.8% YoY; net profit to mother was 0.18 billion yuan, +22.9% YoY; net profit not attributable to mother was 0.19 billion yuan, +19.7% YoY.

Adhere to the fresh strategy lead, and the core categories bucked the trend. The decline in the company's 24Q3 revenue was mainly a drag on other businesses; reverting to the impact of a yogurt cow, the main business still achieved steady growth in a situation where demand in the industry was relatively weak. Mainly due to the 1) category perspective, the company adheres to fresh strategic leadership. Low-temperature fresh milk and low-temperature yogurt are the company's core categories, and maintained good growth in 24Q3. 2) From a brand perspective, Vipshop positions high-end, brand value has been recognized by consumers, and continuous product innovation and regional expansion have led to increased performance; most of the subsidiaries in East China are dominated by low temperatures, and the growth trend continues. 3) From a product perspective, the company insists on breaking the game through innovation, and the share of new products in revenue increases. 4) Channel perspective, DTC business is growing rapidly.

Cost dividends are combined with product structure optimization, and net interest rates continue to rise. The net interest rate for 24Q3 was 6.4%, +1.4pcts year on year; if the impact of factors such as the loss of eliminated cows is excluded, the net interest rate of 6.9% was deducted, +1.4pcts year over year. Looking at the specific breakdown, the gross margin was 28.8%, +2.4 pcts compared to the previous year, thanks to 1) lower raw milk prices and 2) product structure optimization driven by an increase in the share of low-temperature, high-end, and new product businesses. The sales expense ratio was 15.3%, +1.3 pcts year over year. The main reason was that the company increased investment in market and product promotion, and the gross sales margin was +1.1 pcts year over year. The management cost rate was 4.0%, -0.2 pcts year on year, and internal quality and efficiency continued to improve.

Take a short look at peak season stocking and industry restoration to accelerate long-term planning. In the short term, 1) On the supply side, the raw milk cost dividend will continue in 24Q4, and the company's milk source structure is excellent, which can effectively calm supply fluctuations, and is relatively less affected by asset disposal and powder spraying impairment. 2) On the demand side, seven departments including the Ministry of Agriculture and Rural Affairs jointly introduced policies in September, which are expected to accelerate demand improvement; in addition, 24Q4 may benefit from pre-stocking due to the Spring Festival misschedule. In the medium to long term, the trend of increasing penetration rate of the low temperature category will not change. The company will adhere to the fresh cube strategy and seize the dividends of the low temperature category with accurate card positions+multiple brands+product innovation; use DTC channels as an important engine for growth to increase market share. The three major drivers of gross margin improvement, upstream optimization, and cost efficiency improvement will jointly drive the net interest rate towards a five-year strategic plan to multiply net interest rates.

Investment advice: After adjusting the profit forecast, net profit due to mother is expected to be 0.56/0.67/0.8 billion yuan in 2024-2026, +29.0%/21.4%/18.5% YoY, and the corresponding PE is 19/16/13X. The company showed strong management resilience, had clear five-year target planning and execution, and maintained a “recommended” rating.

Risk warning: risk of slowing product structure upgrade, risk of increased competition, risk of food safety.