Event: Tianrun Dairy released its 2023 annual report. 2023H1 achieved operating income of 1,389 million yuan, an increase of 12.62% over the previous year; realized net profit of 126 million yuan, an increase of 16.55% over the previous year. Among them, 23Q2 achieved revenue of 758 million yuan in a single quarter, an increase of 9.77% over the previous year; net profit from the parent was 71 million yuan, a year-on-year decrease of 2.45%. Profit performance fell short of market expectations.
Room temperature categories are growing steadily, and markets outside of the country continue to advance. By category, the operating income of room temperature dairy products/low temperature dairy products/animal husbandry products in 23Q2 was 427/3.15/112 million yuan respectively, +18.64%/+4.96%/-53.24%, respectively. Revenue from Tetra Pak brick products in the room temperature category grew well; revenue from the dairy beer category fell slightly from the same level year on year, mainly due to weak marketing feedback in markets outside of the border. In the low-temperature category, the revenue of Eiklin yogurt declined slightly year-on-year, while the revenue from the barreled acid category increased rapidly. The animal husbandry sector is under pressure due to the long-term low meat prices in the market. In addition, the company strengthened its new product layout and launched a total of 16 new products in 23H1. By region, in 23Q2, the revenue of the internal and external markets was 395/361 million yuan, respectively, +5.86%/+14.03%, year-on-year. As of the end of June '23, there were 375/490 dealers in and outside of the country, respectively, an increase of 27/119 from the end of 23Q1.
The large increase in the number of dealers in markets outside of Xinjiang is mainly due to the merger of Xinnong Dairy. As of the end of June '23, the number of company specialty stores was 859, and the number of new 23H1 stores was 95. By sales model, the operating income of the 23Q2 distribution model/direct management model was 674/83 million yuan, respectively, +9.85%/+7.69% over the same period.
The decline in raw milk prices boosted gross profit margins, and the merger of the Xinnong dairy industry continued to be adjusted. On the cost side, 23H1/23Q2's gross margin was 20.55%/20.97%, respectively, and 23Q2 was +2.11/+0.92 pcts year over year. Upstream raw milk prices are still in a downward channel, helping to increase overall gross margin. On the cost side, the sales expense ratio for 23H1/23Q2 was 5.36%/5.18%, respectively, and 23Q2 was +0.13/-0.39 pcts year on year/month over month. The management expense rates for 23H1/23Q2 were 3.02%/3.05%, respectively, and 23Q2 were +0.41/+0.07 pcts year on year. Overall, 23H1/23Q2's net interest rate was 9.06%/9.34%, respectively, and 23Q2 was 1.17/+0.64pcts year on year/month over month.
The year-on-year decline in net interest rates in the second quarter was mainly due to the short-term negative impact on the profit side after Xinnong Dairy was merged. Furthermore, after the merger of Xinnong Dairy, it can quickly fill the company's adult milk powder side layout and help the company's market layout in Jiangsu and Zhejiang regions. On the upstream side, after the merger of Xinnong Dairy, the company's raw milk self-sufficiency rate is expected to increase further. It is expected that 23H2 Xinnong Dairy's merger will be mainly adjusted and stabilized, and the operation is expected to improve in 2024.
Profit forecast, valuation and rating: Considering that Xinnong Dairy's business merger into the company is still in the adjustment stage, net profit for 2023-2025 was lowered to 2.50/309/360 million yuan (down 7.53%/7.73%/9.20% from the previous time), corresponding to the 2023-2025 EPS of 0.78/0.97/1.12 yuan, respectively. The PE corresponding to the current stock price is 17x/14x/12x, maintaining the “buy” rating.
Risk warning: Expansion outside the border fell short of expectations, raw material prices rose, and new product expansion fell short of expectations.