Incident: The company released its 2024 three-quarter report. 24Q1-Q3 achieved operating income of 1.938 billion yuan, -2.05% year on year, net profit of 0.018 billion yuan, +408.98% year on year; 24Q3 achieved operating income of 0.759 billion yuan, -6.10% year on year, and net profit of 0.047 billion yuan, or -0.62% year on year

The main brewing industry declined under pressure, and ready-to-drink products grew steadily. 1) By product, revenue from the 24Q3 brewing business was 0.496 billion yuan, or -14.9%. Under the relatively weak external demand environment, channel preparation was cautious. The 24Q1-Q3 brewing business achieved cumulative revenue of 1.11 billion yuan, or -8.3% year over year. The annual growth rate is expected to remain basically the same; the ready-to-drink business achieved revenue of 0.254 billion yuan, +17.8% year over year. The main fruit tea online channel revenue is expected to drop significantly, and the growth rate is expected to be slower than the overall rate. The 24Q1-Q3 ready-to-drink business achieved cumulative revenue of 0.8 billion yuan, +8% year-on-year. The annual growth rate is expected to remain basically at the level of the previous three quarters. 2) By channel: 24Q3 distribution channel/e-commerce channel revenue was 0.71/0.025 billion yuan respectively, -3.4%/-46.4% year-on-year. The decline in e-commerce is clearly mainly due to the relative weakening of companies' resource investment. 3) Looking at the subregion, the 24Q3 East China market revenue was 0.363 billion yuan, +4.14%. The base market's advantage was further highlighted due to disturbances in the external environment. The number of 24Q3 dealers increased by 76 net month-on-month, of which East China/Central China increased net by 30 and 28, respectively, and the number of investors increased steadily.

Costs declined, gross margin increased, and profitability was relatively stable. The net profit margin for 24Q3 was 6.22%, +0.34pct year on year. The positive contribution mainly came from the increase in gross margin, and management rates impacted profit margin performance.

1) Gross profit margin: 24Q3 +2.41 pct year on year, main raw material costs decreased; 2) Expense ratio: 24Q3 sales rate +0.23 pct year on year, remained relatively stable. The management rate was +1.03 pct year over year, which mainly affected the increase in equity incentive costs.

The two-wheel drive strategy continues to advance, and we look forward to peak brewing season performance. At present, various aspects such as the company's product planning, organizational structure, and channel model have been basically sorted out. The brewing business has strengthened product innovation and intensive exploration of high-potential energy outlets. In September, the company launched two “Original Leaf Freshly Brewed Light Milk Tea” and “Original Leaf Freshly Brewed Milk Tea” to create a “second choice other than milk tea shops”, which meet current health needs and are expected to reap consumer groups in high-tier cities. Considering that Q4 is the peak season for the brewing business, compounding the impact of the early Spring Festival, the sales performance of Q4 brewing is expected to accelerate month-on-month. The ready-to-drink business prioritizes the development of fruit tea. Frozen lemon tea focuses on model market promotion, and actively promotes the expansion and distribution of goods through channels such as restaurants and snack mass vending machines. It is expected that future revenue will rise steadily.

Profit forecast and investment rating: Taking into account the external environment and the company's various business developments, we adjusted net profit to the mother for 2024-2026 to 0.293/0.337/0.385 billion yuan (previous value 0.305/0.355/0.408 billion yuan), +5%/15%/14% year over year, respectively, corresponding PE was 18/16/14 times, maintaining the “increase” rating.

Risk warning: Economic progress is uncertain, and costs and expenses exceed expectations