Key points of investment:

Event: Company discloses semi-annual results for fiscal year 2024. In the first half of fiscal year 2024, the company achieved revenue of 10.877 billion yuan (YOY -3.5%) and net profit to mother of 1.863 billion yuan (YOY +8.2%).

Ice products dragged down overall revenue performance, and profitability continued to increase. On the revenue side, in the first half of fiscal year 2024, due to the year-on-year decline in revenue in the ice products category in the snack food category, the company's overall revenue was under pressure, down 3.53% year on year. In addition, benefiting from the reduction in consumption costs of some bulk raw materials, gross margin increased 2.03 pct to 47.27% year on year, so gross profit increased 0.80% year on year; due to proper overall control on the cost side, the company's period expense ratio decreased by 0.27 pct year on year (mainly due to sales expense ratio -0.50 pct year on year, management expense ratio +0.87 pct year on year, financial expense ratio -0.64 pct year on year). Furthermore, the net profit margin increased by 1.36 pct to 25.67% year on year. 17.13%, corresponding to a 7.57% year-on-year increase in net profit to mother.

The gross margin of dairy products continues to rise, and emerging channels drive the growth of rice crackers & leisure. In the first half of fiscal year 2024, performance by category: (1) Dairy beverage revenue fell 1.4% year on year, while gross margin increased 3.0 pct year on year to 50.3% year over year. In addition, when broken down, Wangzai Milk's revenue fell 1.6% year on year, and sales remained flat (revenue from canned milk grew by a single digit year on year); revenue from beverages and other subcategories increased 1.2% year over year (revenue from selling seasonal beverages and other subcategories in July-September increased by double digits year on year). On the channel side, the dairy category's performance in wholesale channels and modern channels is weak, but emerging channels such as OEM and content e-commerce continue to grow. Meanwhile, beverages and other subcategories of unique new products combined with creative themed marketing activities have increased rapidly in emerging channels such as content e-commerce platforms, vending machines, and OEMs.

(2) The revenue of the rice crackers category was basically the same year on year (sales volume was low year on year, order growth), while gross margin fell 2.0pct year on year to 41.8%. In terms of channels, overseas markets, which account for nearly 30% of revenue, and emerging channels such as vending machines, OEM, and content e-commerce all grew by double digits. In terms of products, the rice crackers category continues to launch new categories and specifications, such as the Challenger series of ice cakes and fragrant rice crackers, and Wangwang ice cake/rice crackers in large packages (750g, 1kg, etc.) to meet the needs of diverse consumption scenarios.

(3) Revenue from the snack food category fell 9.9% year on year, mainly due to weather and sales pace, etc., while gross margin increased by 1.3 pct to 44.3%. The ice cream category will face next year's peak season through rich product specifications and flavors, intensive cultivation terminals, and development channels. Furthermore, due to the continuous promotion of new product development and multi-channel sales, overseas markets continued to expand sales items (candy category, snack and cake category, etc.) and maintained a rapid growth trend. New products launched within five years accounted for more than 20% of snack food revenue in the first half of FY2024.

Overseas markets continue to grow rapidly. The company's overseas business revenue achieved double-digit growth in the first half of fiscal year 2024. Among them, Asia, America, Oceania, Europe, India and Africa all achieved rapid growth. Furthermore, thanks to the development of new customers and new products, rice crackers, candy, and snack food products have grown significantly. It is expected that in the future, with the commissioning of the Vietnam plant and the establishment of subsidiaries in Vietnam, Thailand, Indonesia, Germany, and North America since 2019, the overseas market will become one of the company's main growth engines in the next 3-5 years.

Implement organizational reforms to further enhance future growth momentum. In order to improve sensitivity to market changes and thoroughly implement diversification strategies, the company's recent internal organizational transformation:

Divisions are set up according to products to collaborate with various channel development divisions and coordinate operation and development at home and abroad; enhance the coordination ability and decision-making efficiency of internal organizations, invest resources in a targeted manner for potential products and new products, and expand the Group's sustainable growth momentum. We are optimistic that the company will release vitality after organizational adjustments and drive the company to better seize market opportunities.

Profit forecasting and investment advice. We expect the company's total revenue for the 2024-2026 fiscal year to be 23.948/24.824/25.678 billion yuan, the main operating income will be 23.61/24.486/25.34 billion yuan, the net profit to mother will be 4.192/4.371/4.596 billion yuan, and the corresponding EPS will be 0.35/0.37/0.39 yuan/share, respectively. We believe that, with reference to comparable companies' PE valuations, we have given the company a PE (2024E) valuation range of 16-20 times, corresponding to a value range of 5.60-7.00 yuan/share, based on the Hong Kong dollar to RMB 0.90 exchange rate, corresponding to a reasonable value range of 6.22-7.78 HKD/share, and continue to give a “superior to the market” rating.

Risk warning. (1) Food safety risks, (2) increased market competition, (3) new products, new channels, and new market expansion fell short of expectations, and (4) upstream raw material costs fluctuated greatly.