Description of the event

Qianhe Flavors announced its 2024 three-quarter report. The company's 2024Q1-3 gross revenue was 2.288 billion yuan (-1.85% YoY); net profit to mother was 0.352 billion yuan (-9.19% YoY), after deducting non-net profit of 0.347 billion yuan (-10.25% YoY). Looking at 2024Q3 alone, the company's total revenue was 0.699 billion yuan (-12.63% YoY); net profit to mother was 0.101 billion yuan (-22.58% YoY), after deducting 0.1 billion yuan of non-net profit (-23.04% YoY).

Incident comments

The high base is compounded by product and channel adjustments, and the revenue decline widened. By product, 2024Q1-3 revenue: soy sauce 1.435 billion yuan (-2.44%), single 2024Q3 -13.82%; table vinegar 0.287 billion yuan (-10.41% YoY), single 2024Q3 -15.67%; other condiments 0.523 billion yuan (YoY +4.21%), 2024Q3 -7.54% YoY. Revenue by region: Eastern 0.498 billion yuan (-3.66% YoY), single 2024Q3 -8.42%; South 0.168 billion yuan (YoY +13.66%), single 2024Q3 -0.03% YoY; Central China 0.31 billion yuan (YoY -3.1%), Single 2024Q3 YoY -21.1%; North 0.413 billion yuan (YoY +3.19%), Single 2024Q3 -17.68% YoY; West 0.855 billion yuan (-5.76% YoY), -11.92% YoY in 2024Q3. After continuous channel expansion since 2020, the company began dealer optimization and adjustment, and the number of dealers decreased by 136 (currently 3,424). It is expected that subsequent dynamic adjustments will continue to maintain the combat effectiveness and adaptability of the dealer team.

Increased competition is compounded by active adjustments, and declining revenue passively raises expense rates, dragging down profitability. The company's 2024Q1-3 net interest rate fell 1.24 pct to 15.36% year on year, gross margin was 1.6 pct year on year, and the period expense ratio was +0.56 pct year on year to 18.65% year on year, with detailed changes: sales expense ratio +1.7 pct year on year, management expense ratio -0.84 pct year on year, R&D expense ratio +0.03 pct year on year, financial expense ratio -0.33 pct year on year, tax and surcharges -0.2 pct year over year. The company's 2024Q3 net interest rate fell 1.86 pct to 14.45% year on year, gross margin was +0.67 pct year on year, and the period expense ratio was +2.47 pct year on year to 20.38% year on year, with detailed changes: sales expense ratio +2.98 pct year on year, management expense ratio -0.65 pct year on year, R&D expense ratio +0.29 pct year on year, financial expenses ratio -0.14 pct year on year, taxes and surcharges -0.11 pct year on year. Since 2024Q2, price competition in the industry has intensified. The company has actively shut down goods, reshaped the price belt to maintain brand positioning, and along with the optimization and adjustment of dealers, the pressure on the revenue side has expanded, and the cost ratio has also been passively raised. Although gross margin has improved due to the downturn on the cost side, profits are still under pressure.

As a brand deeply tied to a healthy positioning, the company follows the trend of healthy upgrading of condiments, and is expected to return to a growth trajectory as product and channel adjustments come to an end; moreover, in the long run, the original purpose of a series of adjustments is also to reshape the brand positioning and thus boost long-term profit levels. Based on historical review, the company can make timely adjustments in the face of difficult business situations, has strong team execution, and there is still plenty of room for growth in national penetration, and it is expected that it will continue to reap improvements in industry share and market position. It is estimated that in 2024/2025, net profit due to mother will be 0.512/0.596 billion yuan, the corresponding EPS will be 0.50/0.58 yuan, and the corresponding PE valuation will be 27/24 times, respectively, maintaining the “buy” rating.

Risk warning

1. The risk of slow recovery in demand;

2. Industry competition further exacerbates risks;

3. Risk of changes in consumer consumption habits, etc.