Conclusions and recommendations:

Performance summary:

The company announced that in the first three quarters of 2024, it achieved total operating income of 89.04 billion yuan, recorded a net profit of 10.87 billion yuan, a year-on-year increase of 15.9%, recorded net profit after deduction of 8.5 billion, a year-on-year decrease of 4.6%; 3Q achieved total operating income of 29.12 billion, a year-on-year decrease of 6.7%, recorded a net profit of 3.34 billion yuan, an increase of 8.5% year-on-year, and recorded net profit after deduction of 3.18 billion yuan, a year-on-year increase 13.4% The 3Q results were better than we expected.

Comment:

Demand for dairy products improved slightly month-on-month. At the beginning of July, the company's channel adjustments came to an end, and demand for inventory replenishment picked up slightly. The decline in the company's revenue in the third quarter was narrower than in Q2 (Q2YOY -19.6%). Looking at the split business, liquid milk achieved revenue of 20.64 billion yuan, a year-on-year decrease of 10.3%; milk powder and dairy products achieved revenue of 6.82 billion yuan, an increase of 6.6% over the previous year. Benefit adjustments were put in place and market share increased. Cold drinks achieved revenue of 1.02 billion yuan, a year-on-year decrease of 16.7%.

Low raw milk prices unleash profits. Q3 gross margin increased 2.4 pcts to 35% year over year. On the one hand, raw milk prices have remained low since this year, and the company's cost pressure is less; on the other hand, after channel adjustments were put in place, the increase in product freshness in the third quarter drove up the price market.

The overall rate is stable. The cost rate remained stable during the reporting period, rising 0.28 pct to 22.33% year on year.

Among them, the sales expense ratio increased by 1.08 pcts year on year to 18.96%, due to increased channel adjustments and related marketing. With the end of related matters, subsequent sales expenses are expected to remain stable; in terms of other cost ratios, the management expense ratio decreased by 0.38 pcts year on year, the R&D expense ratio increased by 0.07 pcts year on year, and the financial cost ratio decreased by 0.5 pcts year on year.

In addition, 3Q calculated asset impairment losses of 0.18 billion, an increase of 0.1 billion yuan over the previous year, mainly due to changes in supply and demand in the dairy market.

Looking at it now, the H1 channel adjustment has been very effective. Currently, inventory is healthy. It is expected that 4Q dairy products will maintain a weak recovery trend. Under the influence of fee control, low costs, and a low base, the profit side will continue to perform well.

The profit forecast was slightly raised. Net profit of 12.22 billion, 13.74 billion, and 15.02 billion yuan is expected to be achieved in 2024-2026 (the original forecast was 11.66 billion, 13.53 billion, and 14.78 billion yuan), with year-on-year increases of 17.2%, 12.4%, and 9.4%, respectively. EPS is 1.92 yuan, 2.16 yuan, and 2.36 yuan, respectively. The current stock price corresponds to PE 14 times, 12 times, and 11 times, respectively, and raised to “buy” .

Risk warning: Terminal sales fall short of expectations, cost growth exceeds expectations, and cost investment exceeds expectations