On April 29, 2024, Qianhe Flavors released the 2023 Annual Report and the 2024 First Quarter Report.

Key points of investment

Under a high base, revenue growth slowed marginally, and profitability remained stable. The company's total revenue for 2023/2023Q4/2024Q1 was 32.07/8.75/895 million yuan, respectively, +32%/-1%/+9%, respectively. It was mainly due to the company's active market development and optimization of marketing channels to improve product market competitiveness. Among them, the 2023Q4 revenue year-on-year decline was mainly catalyzed by the 2023Q4 additive incident. The net profit to mother was 530/1.43/1.55, respectively, +54 million yuan %/ -8%/+7% On the profit side, the company's gross margin in 2023 was 37.15% (same increase of 1 pct), mainly benefiting from the decline in raw material prices. Sales/management expense ratios were 12.22%/3.87%, respectively, -1 pct/+1pct, respectively. The sales expense ratio declined under the spread of scale effects. The increase in management expenses was mainly due to an increase in equity incentive expenses, which ultimately achieved a net profit margin of 16.54% (same increase of 2 pct). The gross margin for 2024Q1 is 35.96% (same decrease of 3 pct), which is mainly due to a decrease in the share of high-margin direct sales channels. The sales/management expenses ratio is 11.82%/2.66%, respectively, +0.1 pct/-1pct, respectively. The combined result is a net interest rate of 17.32% (same decrease of 0.4 pct), and profitability remains basically stable. On the cash flow side, 2024Q1's net operating cash flow was 163 million yuan (up 5194% from the same period). In the dividend plan, the company distributes a cash dividend of 3 yuan for every 10 shares to all shareholders.

The potential of the soy sauce category continues, and production capacity release guarantees a sharp increase in soy sauce volume and price growth in 2023. The company's soy sauce/vinegar revenue in 2023 was 20.40/422 million yuan, up 35%/12%, respectively. Due to declining soybean/packaging prices, the gross margin for soy sauce/vinegar increased 0.4 pct/2 pct to 37.59%/39.07% respectively in 2023. In terms of volume and price breakdown, the sales volume of soy sauce/vinegar in 2023 was 4476/126,600 tons, respectively, and the tonnage price was 0.46/0.33,000 yuan/ton, respectively, +1%/-2%, respectively. Soy sauce benefited from a year-on-year increase in zero-additive dividend revenue. The company achieved a sharp increase in volume and price by promoting new and optimized product structures. Under the high base, soy sauce continued to grow steadily. 2024Q1's soy sauce/vinegar revenue was 568/113 million yuan, respectively, +9%/-6%. While the high base was compounded by the 2024Q1 external demand weakening during the 2023Q1 period, the soy sauce category continued to grow steadily. As the construction of the “Intelligent Condiment Production Line Construction Project with an Annual Output of 600,000 Tons” continues to advance, future production capacity can still meet medium- to long-term incremental demand.

Distribution channels have entered healthy expansion, and the foreign port market continues to develop

The speed of investment promotion has slowed marginally, and distribution channels have entered a healthy expansion. 2023/2024Q1 distribution channel revenue was 23.44/681 million yuan, respectively, and direct sales channel revenue was 8.22/198 million yuan, up 6%/4% respectively. By speeding up the pace of investment promotion, the company led a high increase of 1,020 distributors at the end of 2023 compared to the beginning of 2023; by the end of 2024Q1, the number of distributors in the company was 3,356, a net increase of 106 over the beginning of 2024. Investment promotion progress has been marginally decelerated, and subsequent companies will drive the healthy expansion of distribution channels by optimizing the dealer structure/promoting the decline of channels. The development results of the foreign port market were remarkable. The company's revenue in the East/ South/ Central/ North/ Western regions was 1.90/0.65/1.36/1.66/ 322 million yuan respectively in 2024Q1, compared with the same period

+4%/+43%/+28%/+11%/-1%, the foreign port market development effect is good, and the national layout is progressing steadily.

Profit forecasting

We are optimistic that after the release of zero added dividends in the market enters a steady state, the company will achieve channel decline and foreign port market development through iterative optimization of endogenous channel/organizational strategies. According to the annual report and quarterly report, the 2024-2026 EPS is expected to be 0.61/0.74/0.88 yuan respectively, and the current stock price is 25/21/18 times PE, respectively, maintaining a “buy” investment rating.

Risk warning

Macroeconomic downside risks, consumption recovery falling short of expectations, regional expansion falling short of expectations, new product promotion falling short of expectations, etc.