Incident: Guangzhou restaurants released their 2024 quarterly report. In 24Q1, revenue was 1.01 billion yuan, +10.0% year over year; net profit to mother was 0.7 billion yuan, +2.2% year over year; first-quarter results met market expectations, revenue grew steadily, and profits were slightly under pressure.

The catering business continues to grow rapidly, and markets outside the province are expanding smoothly. By product, 2024Q1's food business revenue was 60 billion yuan, +9.0% year over year; catering business revenue was 380 million yuan, +13.3% year over year. In the food business, mooncakes/frozen food/other products and commodities achieved revenue of 0.09/30/0.1 billion yuan, respectively. The first quarter was the traditional off-season for mooncakes, and sales of mooncake products were generally low. The short-term pressure on mooncake revenue this quarter was mainly due to the impact of the high base of the mooncake business in the same period last year, and the year-on-year decline in mooncakes in the current quarter showed reasonable fluctuations. In terms of the catering business, benefiting from store expansion and industry recovery, the restaurant potential is strong and revenue continues to grow at a high rate. Looking at the subregion, the revenue of 2024Q1 companies in the province/domestic and out-of-province/overseas was 4.5/1.4/0.1 billion yuan, respectively, compared with +7%/+14%/+71%, respectively. The revenue growth rate outside Guangdong Province was faster than that of major companies in the province increased investment outside the province, while the high increase in overseas revenue was mainly due to the low base of 2023Q1.

Product structure changes have put pressure on gross margins, and cost control is effective. 2024Q1's gross margin was 29.8%, -2.6 pp year on year; net margin was 8.0%, -0.6 pp year on year; the decline in gross margin was mainly due to a decrease in the share of revenue from high-margin mooncake products and an increase in the share of revenue from the low-gross margin catering business. The company's sales/management/R&D expenses rates were 9.8%/8.4%/1.8%, respectively, -0.4/-0.7/+0.1pp, respectively. The company strengthened cost control, and sales and management expenses improved slightly.

The distribution network has been optimized and adjusted, and production capacity space needs to be freed up urgently. The company continued to adjust and optimize dealers. The number of dealers decreased by 42, including a net decrease of 15 in Guangdong Province, a net decrease of 28 within and outside Guangdong Province, and a net increase of 1 overseas. The company currently has 1,030 distributors and agents in the food manufacturing business. Subsequent companies will vigorously explore emerging channels and ensure the growth of direct sales channels on the basis of maintaining traditional channels. There is still plenty of room for expansion of the distribution network outside the province. At present, the company's products have entered supermarkets such as Hema, Sam, Costco, Olé, and Metro. The expansion of food production helps continued development. The company currently has four major food production bases in Guangzhou, Maoming, Meizhou, Guangdong, and Xiangtan, Hunan. The Xiangtan quick-frozen production project has basically been completed, and there is still room for future capacity expansion. Based on the medium to long term, the company's Guangzhou Restaurant, Tao Taoju/Likoufu brand undertakes the growing development of the catering industry, and there is considerable room for long-term growth for long-standing brands.

Profit forecast and investment advice: The company is an old Cantonese restaurant brand. It empowers the food business through brand and R&D advantages, and the two main businesses develop collaboratively. At present, the company's channel side has established an online+offline sales system, and is continuously promoting market layout outside the province to support the growth of the food business. At the same time, multiple catering brands are expected to effectively meet the release of consumer demand for catering. Although the growth rate of the company's food business has slowed in the short term due to the weak domestic macro-consumption environment, in the medium to long term, as the company's quick-frozen production capacity continues to expand and the restaurant brand stores accelerate offsite expansion, subsequent growth momentum is strong, and performance is expected to continue to be realized. Considering the impact of increased competition in the food industry in the first half of the year, we lowered our 2024-2026 net profit forecast to 650 million yuan, 740 million yuan, and 8.4 billion yuan, while EPS was 1.13 yuan, 1.31 yuan, and 1.48 yuan respectively. The company was given 20 times PE in 2024, corresponding to a target price of 22.6 yuan, maintaining a “buy” rating.

Risk warning: food safety risks, market expansion outside the province or falling short of expectations, risk of rising raw material prices, etc.