Incident: The company released its 2024 three-quarter report. Total operating income for the first three quarters was 89 billion yuan, a year-on-year decrease of 8.6%; net profit to mother was 10.87 billion yuan, an increase of 15.9% over the previous year. Among them, 24Q3 achieved total operating income of 29.1 billion yuan, a year-on-year decrease of 6.7%; realized net profit to mother of 3.34 billion yuan, an increase of 8.5% over the previous year.

Channel adjustments were put in place, and the decline in Q3 revenue narrowed month-on-month. 1. By product, liquid milk, milk powder, dairy products, and cold drink products achieved operating income of 57.5 billion yuan (-12.1%), 21.3 billion yuan (+7.1%), and 8.3 billion yuan (-19.6%) respectively in the first three quarters of 2024. 1) Liquid milk: Revenue improved quarterly, the market share of room temperature white milk continued to increase, and low temperature liquid milk bucked the trend. 2) Milk powder and dairy products: Infant formula bucked the trend and achieved high single-digit growth, while adult powder remained industry-leading. 3) Cold drinks: Continue to improve channel adjustments, and channel inventory is good. 2. Looking at the subregions, North China, South China, Central China, East China, and other regions achieved revenue of 24.7 billion yuan (-6.3%), 22.2 billion yuan (-8.2%), 16.4 billion yuan (-12.8%), 13.7 billion yuan (-11.2%), and 10.8 billion yuan (-5.7%) in the first three quarters, respectively.

Profitability improved in Q3. 1. In the first three quarters of 2024, the company achieved a gross profit margin of 34.8%, an increase of 1.9 pp over the previous year, mainly due to falling raw milk prices and stable price markets after channel inventory adjustments were in place. 2. The sales expense ratio for the first three quarters was 19.3%, up 1.6 pp year on year; gross sales difference was 15.5%, up 0.3 pp year on year. In the context of excessive milk supply and adjustment of channel inventory, promotional investment was appropriately increased; a decrease in revenue scale led to an increase in sales expenses.

The management cost ratio was 3.8%, down 0.2 pp; the R&D expense ratio was 0.6%, up 0.1 pp; the financial cost ratio was -0.7%, down 0.4 pp year on year. 3. In the first three quarters, the company achieved a net interest rate of 12.3%, an increase of 2.6 pp over the previous year. In addition, asset impairment losses of 0.69 billion yuan were lost in the first three quarters. As the gap between supply and demand for raw milk narrows, it is expected that the pressure to depreciate due to powder spraying will ease; credit impairment losses of 0.37 billion yuan are mainly due to the decline in the ability of some raw milk suppliers to repay in the context of the continued decline in raw milk prices.

Buybacks value investor returns. Starting in May 2024, the company will use its own funds to repurchase 1-2 billion yuan of shares within 12 months. As of October 2024, it has completed the repurchase of 32.14 million shares, with a repurchase amount of 0.76 billion yuan. The repurchase of shares will be used to cancel and reduce registered capital in accordance with the law, showing the company's confidence in future development and valuing investor returns.

Profit forecasting and investment advice. As upstream production capacity is removed, raw milk prices are expected to reach a new balance; combined with the impact of the high base in 2024, the net profit returned to mother is expected to be 12.1 billion yuan, 11.4 billion yuan, 12.1 billion yuan, and EPS is 1.90 yuan, 1.79 yuan, and 1.91 yuan respectively. The corresponding dynamic PE is 15 times, 16 times, and 15 times, respectively, maintaining a “buy” rating.

Risk warning: risk that raw milk prices will continue to rise; industry competition increases risk; food safety risk.