Incident: The company released its quarterly report for the 3rd quarter of '24. Net profit/net profit without return to mother was 88.73 billion yuan/10.87 billion yuan/8.51 billion yuan, respectively, -8.51 billion yuan, and -4.6% year-on-year, respectively; 24Q3 realized revenue/net profit to mother/net profit after deducted non-return to mother was 29.04 billion yuan/3.34 billion yuan/3.18 billion yuan, respectively, compared with the same period compared to year -6.7%/+8.5%/+13.4%

The decline on the revenue side narrowed markedly from month to month. The decline in 24Q3 revenue was significantly narrower than in Q2 (-16.6% in Q2). It is expected that the company's channel inventory will be adjusted in the first half of the year, and direct sales and delivery will gradually recover. Although it has not been corrected due to external factors, the marginal improvement is obvious. Judging from the 24Q3 industry, the growth rate of national dairy production in July-September was -5.7%/1.1%/2.1%, respectively, while the growth rate in April-June was -6.5%/-8.9%/-4.9%, respectively.

Raw milk's low gross margin increased, and good cost control boosted profit growth. The 24Q3 company's gross profit margin was 35.0%, +2.5pct year over year, and +1.3pct month-on-month, all improving. It is expected that the reason is the decline in raw material costs due to lower raw milk prices. In terms of expenses, although the absolute amount of sales expenses decreased slightly, the sales expenses ratio was still +1.1 pct compared to the same period due to the decline in revenue. The management cost ratio was -0.4 pct year on year, continuing the Q2 cost saving trend. The total management expenses for the first 3 quarters of 24 years were reduced by 0.5 billion yuan year on year, the 24Q3 financial cost ratio was -0.5 pct year on year, and the R&D cost rate remained basically unchanged year on year.

Investment advice: In an unfavorable environment where raw milk prices are low and consumption recovery is weak, the company's revenue gradually stabilized and improved marginally, and profits achieved positive growth. The company's excellent management level and leading market position were demonstrated through financial performance. The company's 24-26 EPS is expected to be 1.90/1.84/1.97 yuan respectively. Referring to the valuation level of comparable companies in the dairy industry, the company will be given 18X PE for 24-year EPS, corresponding to a target price of 34.21 yuan, maintaining a “buy” rating.

Risk warning: risk of fluctuations in raw milk prices, risk of policy adjustments, worsening market competition, food safety risks.