Brewed milk tea in cups has taken the lead, adhering to the “brew+ready-to-drink” two-wheel drive, and the future can be expected. Xiang Piaopiao is the founder of cup brewed milk tea in China. Since the first cup milk tea was introduced to the market in 2005, the company has maintained a leading position in cup milk tea, and the current market share is still above 60%. In 2016, the company successfully landed on the Shanghai Stock Exchange and became the “first milk tea stock in China”. In 2017, the company established a “two-wheel drive” strategy, entering the ready-to-drink circuit with two major brands, Meco and Lan Fangyuan, and cultivating Meco juice into a billion-level phenomenal single product in 2019. Due to the epidemic, the company's daily consumption and gift scenarios for brewing in winter have been affected. The ready-to-drink business is under pressure for a short period of time when major consumption scenarios such as schools are restricted. With the overall recovery of consumption after the pandemic in 2023, the company's brewing and ready-to-drink drinks recovered, and the company's revenue increased 9.37% year-on-year in 2023. In the same year, the company formed a ready-to-drink sales team, independently operated the ready-to-drink business, and actively sought full-time distributors in order to make efforts to operate the ready-to-drink business more efficiently. At the end of 2023, the company hired a professional manager with extensive experience in FMCG products as CEO, and has already transferred 5% of the company's shares, demonstrating confidence in the company's development.

The brewing business has room for recovery after the epidemic in the short term, and a second curve is needed to provide incremental growth in the medium to long term. After many years of development, the industry pattern of brewed milk tea in cups in China is relatively stable, and the company leads the market share. Currently, the sales volume of the company's brewed products has more than 10% room for restoration compared to the peak in 2018-2020, and is expected to achieve restorative growth. From the perspective of the company's volume and price, in the past ten years, the company has raised prices for classic and good material series several times to improve the product structure, but currently the company's price increase ceiling is limited, making it difficult to maintain the price increase logic for a long time. Only by increasing volume can the brewing business achieve steady growth. Therefore, the second development curve of the brewing business is particularly important. In 2023, the company launched a variety of new products in the field of pan-brewing to increase product innovation efforts. Currently, it is continuously being explored, and we expect new products to continue to contribute more and more.

The ready-to-drink business is centered on Meco fruit tea. Frozen lemon tea is expected to be relayed. The scale effect is gradually showing, and the performance is flexible. In 2024, the company will focus on cultivating two major products, Meco fruit tea and Lan Fangyuan frozen lemon tea, both of which have great potential for growth: 1) Meco fruit tea: The company pioneered the cup juice tea category in 2018, and Meco juice tea sales exceeded 1 billion yuan in 2019. Since then, the share of juice tea in the ready-to-drink business is expected to be around 80%. We believe that, benefiting from the differentiation of juice tea products, accurate population positioning, and continuous channel cultivation, juice tea has room for continuous growth after the epidemic, and is the core support for the ready-to-drink business in the short term; 2) Lan Fangyuan Frozen Lemon Tea: Frozen lemon tea is a differentiated product launched by the company on a lemon tea race track with market potential based on “competitive thinking”. Frozen lemon tea is a recognized brand. Once launched, the company's innovation in raw materials and formulations meets consumer needs. Currently, it is focusing on the city's core origin and high energy potential. Carry out delivery and continue to advance Freezing, breakthroughs in future distribution and catering channels will also be a key point in the release of frozen lemon tea. We believe that frozen lemon tea has the potential to increase the company's performance in the medium to long term. Currently, the company's low utilization rate of liquid milk tea is putting pressure on the gross margin of the ready-to-drink business. In the future, as the ready-to-drink business gradually expands, the scale effect will continue to show, and profitability is expected to continue to improve.

Profit forecast and investment rating: We expect the company to achieve operating income of 4.114/4.702/5.335 billion yuan in 2024-26, an increase of 13.49%/14.30%/13.46% year-on-year, and achieve net profit of 0.336/0.416/0.503 billion yuan respectively, a year-on-year increase of 19.85%/23.70%/20.95%, EPS of 0.82/1.01/1.22 yuan/share, and the corresponding PE is 14X/11X/9X, respectively , covered for the first time, and gave a “recommended” rating.

Risk warning: Food safety risks, the risk that the company's new product promotion falls short of expectations, and the risk of increased competition in the market.