Incidents:
On April 25, 2024, Sanquan Foods released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved operating income of 7.056 billion yuan, -5.1% year on year; net profit to mother of 749 million yuan, -6.6% year on year; net profit after deducting non-return to mother of 646 million yuan, -8.95% year on year. 2024Q1 achieved operating income of 2,254 billion yuan, -5.01% year on year; net profit to mother of 230 million yuan, -17.76% year on year; net profit after deducting non-return to mother of 197 million yuan, -18.04% year on year.
Investment highlights:
Frozen rice and noodles dragged on for a short period of time, and there was no shortage of highlights under pressure. In 2023, the frozen rice and noodle industry faced both volume and price pressure due to factors such as weak terminal demand, reduced home consumption scenarios, and increased industry competition. The company's revenue for traditional rice and noodle products was -15.74% to 3.689 billion yuan; refrigerated and short-term storage products were -8.29% to 0.95 billion yuan, of which 2023H2 traditional rice noodles/refrigerated and short-term warranty revenue declined 24.54%/10.24% year-on-year respectively, mainly due to increased price competition for 2023Q4 dumplings, and the long-term decline in pork prices had a negative impact on sales.
The company grasped the trend of prepared food and emerging rice and noodles. The prepared food focused on beef, lamb and Chinese and Western food shabu-shabu scenarios. Revenue of +28.44% of the same period reached 1,076 billion yuan; innovative rice and noodles reached 2.14 billion yuan compared to the same period last year. By channel, the company increased its B-side development efforts. On the one hand, it actively developed small B; on the other hand, it improved its customized and personal service capabilities for Big B, and the restaurant market achieved revenue of 1.43 billion yuan, +17.93% year-on-year; and achieved net profit of 111 million yuan without return to mother, an increase of 67.1% over the previous year. The retail side achieved revenue of 5.57 billion yuan in 2023, -9.68% year over year, mainly due to poor customer flow in 2023 in traditional supermarkets, but the company is currently speeding up the layout of member supermarkets, discount chains, fresh food convenience and online channels. Among them, direct-run e-commerce revenue is +21% year-on-year, and channel optimization is in progress.
The restaurant's profit level is impressive, and accurate marketing has improved the cost-efficiency ratio. The company's gross margin in 2023 was 25.84%, -2.23pct year-on-year. Revenue and gross margin of traditional rice and noodles, mainly high-margin dumplings, declined. The gross margin was -3.31pct to 29.94% year over year, and the share of revenue fell to 52% from 59% in 2022, which still had a big impact on the overall situation. Looking at the channel, the gross margin of retail and catering was 25.67%/24.76%, respectively, -3.54%/+4.02%, respectively. The profit level of the restaurant side achieved relatively rapid growth. We think it is mainly due to the development of catering customers and the introduction of new products, the optimization of the catering product structure, and the increase in the proportion of high-margin products. In 2023, the company's cost-side control was steady, and the company strengthened its precise investment in C-side promotional materials and promoters. The sales expense ratio reached 11.5% year-on-year; under the influence of equity cost rebounds, the management expense ratio reached 2.3% year-on-year. The decline in net interest rate for the whole year narrowed sharply compared to gross margin. -0.15pct year on year was 10.62%.
Product channel reforms are progressing, and improvements in quick-freezing faucets can be expected. Considering current macro demand, industry competition, and low pig price levels, we believe that traditional rice noodles such as dumplings and traditional channels such as large stores 2024Q1 will still drag down the company's revenue and profits. 2024Q1 gross margin/net margin was 26.6%/10.19%, respectively, -1.68/-1.59pct year-on-year, respectively. As a quick-frozen rice and noodle leader, the company has strong brand awareness and recognition. Currently, the product side creates innovative products for segmented scenarios and audiences. Comprehensive channel-side optimization: 1) Vigorously develop catering channels, forge old and new ones, and rely on strong R&D capabilities to continuously introduce new products, strengthen service capabilities, and enhance customer stickiness; 2) lay out various new C-side business formats and introduce professional e-commerce teams to further amplify the brand's volume; 3) Dynamic adjustments and efficiency improvements go hand in hand with traditional channels such as direct-run supermarkets. The company's products and channel structure continue to be optimized. As reforms advance, it is worth looking forward to improvements in the operation of the quick-frozen faucet.
Pay attention to shareholder returns and increase dividends. According to the 2023 annual report, the company plans to distribute a cash dividend of 5 yuan (tax included) to all shareholders for every 10 shares based on a total share capital of 879184048, for a total of 440 million yuan, increasing the proportion of net profit attributable to mother from 38% in 2022 to 59%.
Based on the closing price on April 26, the dividend rate was 4.1%, and the dividend return was generous.
Profit prediction and valuation: As the founder and leader of frozen rice and noodles in China, the company has strong brand power and product research and development strength. Currently, it is undergoing comprehensive reform and optimization on the product and channel side, and new products and channels have strong potential for growth. We expect the company to achieve operating income of 72/76/8 billion yuan in 2024-2026, an increase of 3%/5%/5%; net profit to mother of 7.64/7.97/853 million yuan, up 2%/4%/7% year on year, corresponding EPS of 0.87/0.91/0.97 yuan, respectively, and corresponding PE of 14X/13X/12X respectively, covered for the first time, giving it an “increase in weight” rating.
Risk warning: 1) The company's B-side development falls short of expectations; 2) C-side demand recovery falls short of expectations; 3) raw material costs are rising too fast; 4) promotion of new products falls short of expectations; 5) food safety risks.