Incident: Three Squirrels released their 2024 semi-annual report. 2024H1 achieved revenue of 5.075 billion yuan, an increase of 75.39% year on year; net profit of 0.29 billion yuan, up 88.57% year on year; after deducting non-net profit of 0.228 billion yuan, an increase of 211.79% year on year. Among them, 2024Q2 achieved operating income of 1.429 billion yuan, a year-on-year increase of 43.93%, net profit of -0.019 billion yuan, an increase of 51.21% year-on-year, and -0.035 billion yuan after deducting non-net profit, an increase of 45.02% year-on-year.

The performance was in line with expectations, and Douyin's growth dividends continued to be released. 2024Q2's performance was in line with expectations and fell at the center of forecasting. 2024H1's sales volume was 0.0509 million tons, up 92.94% year on year. The tonnage price was 0.0996 million/ton, and the tonnage price fell 9.1% year on year after implementing the high-end cost performance strategy. ① By channel, the 2024H1 online channel achieved overall revenue of 4.09 billion yuan, while Douyin, Tmall, and JD achieved revenue of 1.224/1.083/0.793 billion yuan respectively, an increase of 180.73%/28.32%/20.33% over the previous year. The company implemented a D+N omni-channel operation system, and short video e-commerce became the engine for a new category, creating a variety of popular products such as dried mangoes, buffalo milk and millet toast, quail eggs, spicy marinated gift packs, and effectively driving the growth of traditional e-commerce shelves, achieving an increase of nearly 1 billion yuan.

2024H1 offline distribution reached 0.669 billion yuan, a year-on-year increase of over 100%. Five offline dealer co-building meetings were set up in the first half of the year. The product system was recently sorted out, and it is estimated that the products adjusted in August will enter offline channels one after another. By the end of June 2024, the company opened 209 national snack stores, adding 60 new stores, and 116 of the original stores. 2024H1 National Snack Shop had revenue of 0.175 billion yuan. As of the end of June, 209 National Snack Stores had opened, adding 60. There were 116 original stores, corresponding revenue of 0.055 billion yuan. ② By category, revenue from nuts/baking/comprehensive categories was 2.76/0.609/0.934 billion yuan, up 67.9%/38.85%/164.82% year on year, and gross margin was +1.54/-0.18/+0.17pct year on year, respectively. The company's product matrix continues to be rich. The popularity of the Spring Festival nut gift box this year led to rapid growth in the basic nut market. At the same time, gross margin increased steadily, driven by increasing the proportion of direct harvesting and increasing the proportion of self-production in the upstream supply chain of nut construction. Fawn Blue upgraded to a new position of “high-end healthy snacks for children”, created a number of 10-million-grade hits such as baby noodles, cod sausage, hawthorn sticks, calcium and zinc drinks, and launched million-grade high-end health products such as 0 sucrose lollipops, prawn slices, and pear juice. 2024H1 revenue increased 65.9% year-on-year to 0.385 billion yuan. Through the new “integration of product and sales” organization, refined operations were carried out, and profits were achieved for three consecutive quarters, and the profit side continued to improve in the first half of the year.

Gross margin has increased steadily, sales and promotion expenses have increased dramatically, and the performance after deducting non-net interest rates is impressive.

The gross margin of 2024H1 was 25.85%, up 0.88 pct from the previous year. The increase in gross margin was due to the optimization of the upstream nut supply chain and the increase in self-production ratio. The sales/management/R&D/finance cost ratio was +0.39/-1.95/-0.2/+0.02 pct. The company increased its offline and online promotion efforts in the current period. The promotion and platform service fees were 0.607 billion, an increase of 97.76% over the previous year. Management rates have improved along with scale effects and cost reduction optimization. The performance of 2024H1 deducted non-net interest rates was impressive, increasing 3.07 pct to 4.5% year over year.

Investment advice: Based on the interim report and continuous verification of the rapid growth of the Douyin channel, we will adjust the profit forecast. Revenue growth is expected to be 47%/31%/25% in 2024-2026, with net profit growth rates of 80%/54%/39%, EPS of 0.99/1.52/2.11 yuan respectively, and corresponding PE of 17x/11x/8x respectively. Based on 2024 results, the target price will be adjusted to 21.78 yuan, and the rating will be upgraded to a “buy” rating.

Risk warning: Food safety risks, channel expansion falls short of expectations, industry competition increases risks.