Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 3.499 billion yuan, +20.22% year over year; net profit to mother was 73 million yuan, -49.21% year over year, after deducting non-net profit of 122 million yuan, -14.95% year on year. 2023Q4 achieved revenue of 917 million yuan, +6.67% year over year; net profit attributable to mother - 85 million yuan, -297.22% year over year, after deducting non-net profit of -24 million yuan, -148.83% year on year. 2024Q1 achieved revenue of 916 million yuan, +15.31% year over year; net profit to mother was 77 million yuan, +53.96% year over year, after deducting non-net profit of 68 million yuan, +40.29% year over year. The company plans to pay out 0.5 yuan per share (tax included).

2024Q1 revenue growth was steady, and new cream products continued to increase at a high rate. In 2023, driven by new supermarket and restaurant customers, the company achieved +20% year-on-year revenue for the whole year. By channel, the revenue share of company bakeries/supermarkets/new restaurants and retail sales in 2023 was about 55%/30%/15%, respectively; 2024Q1 revenue accounted for 51%/31%/17%, respectively, and revenue was +25%/-10% to -5%/+50% +, respectively. The Q1 catering channel opened new direct customer contributions increased, and the volume of new cream products drove a slight decline in supermarket revenue. The revenue of supermarkets declined slightly, mainly due to the decline in traffic in high-tier cities due to the fall in traffic in high-tier cities during the Spring Festival. By product, revenue from frozen baking/cream/sauce/fruit products in 2023 was 22.1/6.5/23/190 million yuan, respectively, or +23.9%/+27.7%/+18.1%/-8.5%. The increase in frozen bakery products was mainly contributed by the increase in order volume of new supermarket products and new catering customers. At the same time, the company's new UHT cream production line was put into operation, and the new cream product performance was impressive. 2024Q1 continued the rapid growth trend, driving the cream business Q1 to double growth. In terms of other products, frozen baking revenue in Q1 accounted for about 61%, which was basically the same as the previous year. The slowdown in revenue growth was mainly dragged down by the decline in revenue from supermarket channels.

Procurement management optimized+new product profit improvement, 2024Q1 profit level improved significantly. In 2023, the company's gross margin was -0.4 pct year on year to 31.4%, mainly because leading dealers in 2023Q4 confirmed annual rebate amounts, and Q4 gross margin -4.3 pct year-on-year to 28.2%. In terms of expenses, the company's sales/management expenses rates in 2023 were +1.6/+1.1 pct, respectively, and the R&D expenses rate remained flat year over year. The increase in sales and management expenses was mainly due to the increase in the number of the company's transit warehouses and promotion activities in 2023, which led to a significant increase in warehousing and transportation expenses and channel expenses. At the same time, the company accelerated the calculation of equity incentive expenses in Q4. In addition, asset impairment losses totaled 31.1 million yuan, mainly trial sales of new products from major catering customers and other smaller categories, and the annual net interest rate was 2.9 pct to 2.0%. The profitability of the 2024Q1 company improved markedly. On the one hand, the Q1 company's gross margin was +0.6pct to 32.6% year-on-year, mainly due to the optimization of procurement management and the increase in gross margin of new cream products. On the other hand, the reduction in equity incentive costs led to a 0.7 pct year-on-year decrease in the management expense ratio, and stable control of sales and R&D expenses rates. Q1 was +0.2/-0.1 pct year-on-year, respectively. Furthermore, asset impairment losses decreased by 1.09 million year-on-year and 7.54 million month-on-month. Combined, Q1 net interest rate was +2.1 pct to 8.4% year over year, and after deducting non-net interest rate, +1.3 pct to 7.4% year over year.

The growth momentum of new cream products is relatively good. The cost control effect is initially reflected, and profits are expected to grow flexibly during the year. This year, the company will continue to work hard on new UHT series cream products to deal with weak demand for downstream baking and the penetration rate of extruded semi-finished products. The cream industry is a sub-category with a large sales scale among baking ingredients, and has higher R&D and production barriers compared to other baking ingredients, so it can obtain strong stickiness and higher profit levels. Currently, there is a domestic consumer trend of refrigerated cream replacing frozen cream. In the future, cream represented by whipped cream still has a lot of room to upgrade and grow. The company's new cream production line at its Foshan plant will be put into operation within the year. New cream products will be sold for a longer time this year, and it is expected that there will be more growth. At the same time, the company signed a strategic contract with Huazhuhui to become its only officially designated bakery supplier, and has already provided milk cover products to a leading tea customer; the results of cooperation with major customers such as Tustin and Yum are also expected to gradually be reflected within the year. It is expected that the company's catering channel will continue to increase this year. The supermarket channel is expected to achieve steady growth with the opening of new stores by key customers and the introduction of new products from the company. It is expected that the company's expenses will continue to be controlled and optimized this year. The effects of 2024Q1 optimization have been initially reflected, and future profitability is expected to be further improved.

Investment advice: We expect 2024-2026 revenue of 40.9/47.8/5.58 billion yuan, net profit to mother of 2.7/3.4/3.9 billion yuan, +268%/25%/16% year-on-year, corresponding PE of 23/18/16X. We gave 28 times PE according to our 2024 results, with a target price of 44.73 yuan for one year, maintaining a “buy” rating.

Risk warning: food safety risks; increased industry competition; risk of rising raw material costs; economic recovery falling short of expectations; capacity construction falling short of expectations.