Yanghe Co., Ltd. announced its 2024 three-quarter report. 1-3Q24 achieved revenue of 27.52 billion yuan, -9.1% year-on-year, net profit to mother of 8.58 billion yuan, -15.9% year-on-year, net profit of 8.4 billion yuan without return to mother, or -17.4% year-on-year.

3Q24's revenue was 4.64 billion yuan, 44.8% YoY, net profit attributable to mother 0.63 billion yuan, -73.0% YoY, net profit not attributable to mother 0.46 billion yuan, -81.4% YoY. By the end of the third quarter, the company's contract debt was 4.97 billion yuan, +1.03 billion yuan month-on-month, and +0.19 billion yuan month-on-month compared to the same period last year. In the third quarter, the company fully unleashed channel risks, and short-term performance was under pressure. We expect the company's fundamentals to recover and maintain its buying rating after deep adjustments.

Key points to support ratings

In the 3rd quarter, the company took the initiative to go to the warehouse and adjust the pace of delivery. Advance payments performed better than revenue. 3Q24's revenue was 4.64 billion yuan, or -44.8% year-on-year, with a significant decline (1Q24 and 2Q24 revenue growth rates were +8.0% and -3.0%, respectively). Affected by the poor overall consumption environment and increased competition within the province, the company actively adjusted the delivery pace, relaxed channel repayment requirements, and released channel risks. By the end of the third quarter, the company's contract debt was 4.97 billion yuan, +1.03 billion yuan month-on-month, and +0.19 billion yuan month-on-month compared to the same period last year. Advance payment performance was better than revenue. (1) By product, since the beginning of the year, the company has continued to strengthen banquet channels and focus on bottle opening rates and inventory indicators. We judged that the overall performance of Dream 3 Crystal and Ocean Blue in the 3rd quarter was better than Dream 6+, which has a higher price range. (2) Looking at the subregion, considering the intensification of competition within Jiangsu Province, we determined that the company continued the trend of the first half of the year in the 3rd quarter, and grew faster than within the province (1H24 growth rates within the province and outside the province were +1.4% and 7.5% respectively).

3Q24 The company's cash flow is under pressure, and the profit side fluctuates greatly. (1) The gross margin of the 3Q24 company was 66.2%, down 8.6pct from the previous year. We judge that on the one hand, it is related to product restructuring, and on the other hand, it is related to the company's increased trade-off investment to promote marketing. (2) The four expense ratios of the 3Q24 company were 35.6%, +15.8%. Among them, the sales expense ratio and management expense ratio were +12.3pct and +4.3pct to 27.8% and 10.3% year-on-year, respectively. The main reason was a decrease in revenue scale, a passive increase in the cost ratio, and a year-on-year decrease in the absolute amount of sales expenses and management expenses of 3Q24. The 3Q24 corporate tax and surcharge ratio was 17.8%, an increase of 1.6 pct over the previous year. (3) The 3Q24 company's operating cash flow was 1.41 billion yuan, -65.3% year over year, and sales revenue was 6.42 billion yuan, or -33.5% year over year, under pressure on cash flow. Overall, 3Q24's net interest rate to mother was 13.6%, a year-on-year decline of 14.2pct, and profitability fluctuated greatly.

valuations

Competition within Jiangsu Province is fierce. By focusing on channels, brands and distributors, the company has carried out in-depth work to increase points and expand its reach, and continues to cultivate the provincial market. The company is currently in a period of deep adjustment, and the results of the reform will still take time. After channel risks are fully released, the company's fundamentals are expected to gradually recover. The company attaches importance to shareholder returns, and plans that the total annual cash dividend for 24-26 will not be less than 70% of the net profit attributable to shareholders of listed companies in that year and not less than RMB 7 billion (tax included), with a dividend ratio of over 5%. Based on the company's three-quarter results and current development stage, we adjusted our previous forecast. We expect the company's revenue growth rates to be -10.2%, +1.1%, and +6.9% respectively in 2024-2026, with net profit growth rates of -19.4%, +2.2%, and +7.4%, EPS being 5.36, 5.48, and 5.88 yuan/share, respectively, and corresponding PE of 15.4X, 15.1X, and 14.1X respectively, maintaining the purchase rating.

The main risks faced by ratings

Economic recovery fell short of expectations, and channel inventories exceeded expectations. The provincial market is being squeezed by competitive products.