Key points of investment

Incident: On April 25, the company released its annual report and first quarter results. In 2023, the company achieved operating income of 799 million yuan (+0.10% YoY) and net profit of 131 million yuan (+2.07% YoY). In 2024Q1, the company achieved operating income of 166 million yuan (-17.92% YoY) and net profit to mother of 189 million yuan (-46.94% YoY).

Demand for terminals is weak, and the company's short-term operations are under pressure. In 2023, the company's sales volume increased 5.80% year on year, and the tonnage price fell 5.39% year on year. Due to weak terminal demand, sales of low-value products were relatively good. 1) In terms of categories, revenue from meat and poultry, aquatic products, and other categories was 530 million yuan (+0.57% year over year), 210 million yuan (-2.65% year over year), and 47 million yuan (+5.62% year over year), respectively. Among them, low-value poultry and pork performed well. Revenue in 2023 was 132 million yuan (+6.90%) and 59 million yuan (+7.74% year over year), respectively. 2) By channel, direct sales and other performance were relatively good in 2023, with revenue of 0.14 million yuan (+25.58% year over year), revenue from franchise stores, distributors, and wholesale channels was 428 million yuan (+0.65% year over year), 97 million yuan (-23.16% year over year), and 213 million yuan (-1.50% year over year), respectively. In 2023, the company had 1,823 franchise stores (net increase of 132 over year), 728 dealerships (net increase of 51 over year), 83 wholesale customers (net increase of 46 over year), and 535 supermarket customers (net increase of 98 over year).

Gross margin improved in 2023, and new production capacity investment affected short-term profitability. The gross margin in 2023 was 26.38% (+2.30pct year on year), mainly due to the decline in raw materials; the net profit margin was 16.95% (-0.99pct year on year), mainly due to new production capacity investment and personnel increase. The rate for the 2023 period was 8.07% (+1.96pct year over year), of which the sales rate increased by 1.16pct to 5.01%, and the management rate increased by 1.47pct to 5.37%. The gross margin for 2024Q1 was 25.00% (-1.20pct year on year), mainly due to the company actively adjusting prices to cope with the market; the net profit margin was 11.39% (-6.23pct year on year). The cost rate for the 2024Q1 period was 11.96% (+3.89pct year on year), with the sales rate increasing by 1.69 pct to 6.00% year over year, and the management rate increased by 2.94 pct to 7.53%, mainly due to increased investment in personnel and marketing activities.

Investment advice: Weak demand for consumer terminals in the short term has put pressure on the company's operations. We adjusted our profit forecast and downgraded it to an “increase” rating. Net profit due to mother is expected to be 1.13/1.30/141 million yuan respectively in 2024/2025/2026, with year-on-year growth rates of -16.26%/14.83%/8.39% respectively. The corresponding EPS is 0.64/0.74/0.80 yuan, and the corresponding PE is 42.98/37.43/34.53 times.

Risk warning: macroeconomic fluctuations; increased industry competition; production increases falling short of expectations; food safety issues.