Q1 performance achieved double-digit growth at a high base, exceeding expectations. The company's Q1 realized revenue of 2.18 billion yuan, an increase of 12.9%, of which the core business private brand milk powder revenue of 1.93 billion yuan, an increase of 12.6%. In the case of the high revenue base of 2020 Q1 and the intensification of overall competition in the 2021 infant powder market, the company achieved double-digit growth and exceeded market expectations. Q1 achieved a net profit of 330 million yuan, an increase of 22.9% over the same period last year. Excluding the profit and loss impact of changes in the fair value of equity incentives over the same period of 20 years, the adjusted net profit increased by 11.0% compared with the same period last year.

Hipnokai bucked the trend and the overall milk powder is expected to maintain rapid growth. The revenue of the company's milk powder Q1 was 1.05 billion yuan, an increase of 36.5%. The core product, Hipnokai, still achieved rapid growth against the trend despite the intensification of overall competition in the infant powder market, with sales reaching 720 million yuan, an increase of 58.7%. At the same time, after the adjustment of the operating structure last year, sales also returned to rapid growth. It is expected that this year, Hipnokai will continue to build a "1-3" product portfolio, increase investment in brand building, increase the frequency of activities, and steadily open up terminals, taking into account the multi-capacity and coordinated development of Menado brands, we predict that the company's milk powder revenue will maintain high double-digit growth in 2021.

The adjustment of goat milk powder is basically over, and double-digit growth is expected to resume throughout the year. The revenue of the company's sheep milk powder Q1 was 870 million yuan, down 7.1%, narrowing compared with 2020 Q4 (- 12.8%), while increasing by 15.3% compared with Q4, showing an improvement trend. The revenue of domestic / overseas sheep milk powder was 83000,000 yuan respectively, down 5.9% and 27.2% respectively. The large decline in overseas markets is mainly affected by the epidemic, but the relatively low share has a limited impact on total revenue. Domestic revenue increased 29.7% month-on-month compared with Q4, and the year-on-year decline was mainly due to the high base of revenue caused by hoarding of goods by dealers and consumers during the epidemic last year. However, it can be observed that the company's channel adjustment of milk powder in Q3/Q4 has achieved results, the sales rhythm has basically recovered, and the channel inventory and sales have been adjusted back to the normal level. It is expected that the company will continue to consolidate the channel, boost dealer confidence by holding dealer meetings, adjusting sales model and strengthening online and offline brand marketing. at the same time, the company is expected to launch more high-end new products this year and next year to enrich the sheep milk powder product line. We expect the revenue of goat milk powder to gradually return to double-digit growth in 2021. The revenue of the company's private brand and other milk powder business / nutrition products reached 23 million yuan, up 19.8% and 11.3% respectively. The decline in nutrition business is mainly due to the gradual transfer of part of the production of NC products to China, and Q2 is expected to be able to carry out production. At the same time, the company has been approved a self-developed infant probiotics strain on April 25. In the future, we will speed up the research and development of new products and domestic sales channels of NC and Ai Yisen probiotics.

As sales increased and other business losses narrowed, profitability gradually recovered. The company's Q1 gross profit margin is 51.1%. If deducting the loss of 21 million yuan from other milk powder business, the gross profit margin is 52.0%, and the core business gross profit margin has been restored compared with the same period last year. The loss in other milk powder business is mainly due to the impact of the epidemic in overseas markets. The prices of goat milk powder and goat cream, by-products of sheep whey protein processing, have dropped significantly, but the loss has continued to narrow compared with Q4. The company's sales / management / financial expense rate is 25.5%, 8.0%, 0.3%, which is basically the same as the same period last year. After the adjustment of the company, the net interest rate returned to 2.1pct to 15.2%. It is expected that in the future, with the increase in the proportion of core business, the loss of non-core business will narrow, and profitability is expected to continue to improve.

Investment suggestion: as the company's sheep milk powder business is still recovering, we downgrade the company's revenue forecast for 2021-2023 to 91.5 billion yuan 104.9 billion yuan, an increase of 14.6%, 14.6%, 13.9%, 12.2%, 14.4%, 1.69 billion and 21.0%, 18.2%, 17.9%, respectively, corresponding to a target price of HK $15.4 billion, corresponding to 18 times 2021 PE, which is equivalent to a year-on-year increase of 21.0%, 18.2%, 17.9%, and a target price of HK $15.4 billion, corresponding to a year-on-year increase of 18 times 2021. Maintain a "buy" rating.

Risk hints: the competition in the sheep milk powder market aggravates the risk, the promotion effect of the milk powder is not as good as expected, the food safety risk, and the risk of continuous decline of the newborn population.