Sales in 2023 were in line with expectations, and net profit fell short of expectations: Jianhe International announced preliminary results for 2023. Annual sales increased by a single digit (in line with conformity/9%/8% expected by BOC International), but adjusted net profit increased by a single digit year-on-year, which was lower than the market/BOC International forecast of 24%/19%. The net profit announced by the company fell by a single digit year on year due to the following one-time factors:

1) Inventory write-off and provision of approximately RMB 178 million for the imported infant formula series still awaiting approval of the new national standard; 2) Past acquisitions of Aurelia and Good Go? The impairment of goodwill of RMB 100 million due to t; 3) Increased financial costs and increased foreign exchange losses due to the depreciation of the RMB against the US dollar.

The cash balance is lower than expected and may attract investors' attention: By the end of 2023, Jianhe International's cash balance fell from RMB 2.1 billion in June 2023 to RMB 1.37 billion, lower than our estimate of RMB 2.1 billion. This already includes $1.4 billion in debt repayments, which is consistent with our model, so we're not sure why cash is falling faster than expected. We note that Jianhe International will still need to refinance in the first half of 2024, and interest rates are likely to be higher.

Driven by strong growth in nutritional supplements, sales growth in 2023 was in line with expectations, but was offset by continued weakness in infant formula: by sector, revenue from adult nutrition and care (ANC), infant nutrition and care (BNC), and pet nutrition and care (PNC) achieved “strong double-digit growth”, “low 10-20% decline”, and “strong double-digit growth” in 2023, respectively.

ANC and PNC performed strongly, driven by nutritional supplements. Basically consistent with updates in the first nine months of 2023, the BNC business may have faced greater difficulties in the fourth quarter, as the 10-20% low-level decline for the whole year was higher than the 9.7% decline in the first nine months of 2023, mainly due to increased competition during the transition to the new national standard, which led to a 10-20% mid-range drop in infant formula sales, which was offset by a high year-on-year increase in the number of infant probiotics and nutritional supplements.

Maintaining a neutral rating: The main reason for the relatively strong performance of Jianhe's stock price was that sales of nutritional supplements were strong in the first nine months of 2023, but the initial performance for the whole year lacked quantifiable data, so it was impossible to assess the growth trend in the fourth quarter. The company's previous guidance meant that growth in the fourth quarter would normalize. The decline in cash balances is also the focus of investors' attention. We maintain a neutral rating, with a target price of HK$10.4, based on 6.0 times 2024 price-earnings ratio and 0.22 times PEG, and 27% compound earnings per share growth rate of 27%. Jianhe International will hold an analyst briefing on March 27th.