From July to September 2024, the growth rate of zero catering revenue continued to slow down compared to 24Q2. In September, the year-on-year rate for restaurants with zero or above quota in China was +3.1%/+0.7% year-on-year, respectively.
The Zhitong Finance App learned that Dongwu Securities released a research report saying that overall demand for Social Zero Catering is still weak. It is predicted that condiments will follow a weak recovery trend in the next 2-3 quarters, and marginal improvements can still be expected. The condiment cost dividend strengthened profits in the sector. Whether it was basic condiments or complex adjustments, the leading performance was more prominent; overall demand in the dairy industry continued to be under pressure in 2024, dairy products were repaired in stages, and marginal improvements were made. Judging from the phased restoration, the Q3 profit inflection point came first. After a sharp decline in costs, the improvement in gross sales margin began to be realized, and the demand-side margin did not continue to deteriorate.
The main views of Dongwu Securities are as follows:
Condiments: Cost dividends strengthen sector profits, and leading performance is outstanding.
1) Revenue side: Affected by factors such as demand driven by double sections and steady progress in channel reform, the year-on-year growth rate of revenue from 24Q3 Haitian, Zhongju, and Hengshun improved compared to 24Q2. Among them, the channel reform results of leading Haitian flavor industry were outstanding, continuing the 24Q2 growth trend and showing the resilience of leading businesses; benefiting from increased penetration rate+improved industry pattern, the 2024Q3 compound adjusted revenue performance was better than basic condiments. Among them, the revenue growth rate of leading Tianwei Foods was leading the industry in terms of year-on-year growth rate; whether basic condiments or remodeled, the revenue growth rate of the leading condiments was leading the industry. The initial performance is more prominent, in line with the general rules of consumer goods.
2) Margin side: The year-on-year decline in the prices of the main ingredients for condiments in 2024Q3 increased compared to 24Q2, and cost dividends drove a year-on-month improvement in the gross margins of major condiment companies.
3) Net interest rate: The dividends of leading reforms have been released, the cost investment is more rational, cost dividends are compounded, and the profitability of the sector has generally increased.
Dairy products: phased restoration, Q3 profit inflection point first.
The bank believes that the dairy industry will recover in stages. The first stage is profit improvement. With raw milk costs continuing to decline, gross sales margin improvement is the first stage, and the second stage is demand repair. Demand confirmation and repair channels will help the raw milk cycle to recover upward. Even if it rises moderately, the dairy industry pattern will improve.
1) Revenue side: Affected by factors such as weak demand and oversupply of raw milk, the revenue of the 2024Q3 dairy sector was under pressure. The revenue of major dairy companies all declined year on year. Among them, leading Yili shares benefited from the gradual adjustment of channel inventory and marginal operating improvements, and the year-on-year decline in 24Q3 revenue narrowed.
2) Industry supply and demand: On the supply side, the operating pressure on upstream ranches accelerated the elimination of production capacity. By the end of September 2024, China had 6.24 million heads of dairy cows, a decrease of 0.057 million heads; on the demand side, dairy industry revitalization policy was introduced in September 2024, and dairy production in August/September 2024 was +1%/+2% year-on-year, respectively, reversing the downward trend during the year, and industry demand improved marginally.
3) Gross sales gap: The average price of fresh milk in the main production areas fell 15% year on year in 2024Q3, and the cost dividend drove the increase in gross margin; competition in the industry slowed down after marginal improvement in supply and demand, the increase in sales expenses of dairy companies was better than expected, and the increase in the sector's gross sales margin exceeded expectations due to the upward raw milk cycle.
4) Net interest rate: The marginal easing of the conflict between supply and demand further promoted the marginal improvement of impairment losses of dairy companies, compounded by a boost in gross sales margin, and the 2024Q3 sector ushered in a profit inflection point.
Overall demand remains weak, and marginal improvements can still be expected.
From July to September 2024, the revenue growth rate of zero catering companies continued to slow down compared to 24Q2. In September, the demand for B-side condiments was weak, and the share of C-end condiments increased. It is predicted that condiments will follow a weak recovery trend in the next 2-3 quarters; the brewing cycle for soy sauce products will be 1-2 quarters, and some condiment companies will lock prices on raw materials in a phased manner. The bank expects the condiment sector's cost dividend to continue. Overall demand in the dairy industry continued to be under pressure in 2024, and marginal reserves improved. Judging from the phased recovery, Q3 costs fell sharply and the gross sales gap began to improve, and the demand-side margin did not continue to deteriorate.
Investment advice:
1. Condiments: We recommend Tianwei Foods (603317.SH) and Yihai International (01579), which have improved in a polymodulation pattern. Continue to pay attention to the Haitian flavor industry (603288.SH), where the effects of channel reform are initially showing, and focus on the improvement of corporate governance and the continuous advancement of channel reform, Zhongju Hi-Tech (600872.SH).
2. Dairy products: The upward direction of the raw milk cycle remains constant, and improving demand will help. From the three dimensions, 1) sector opportunities brought about by upward cycle recovery, 2) allocation value of individual stocks with stable financial and performance, such as asset quality and cash flow, 3) dividend ratio value, recommend Yili Shares (600887.SH) and Mengniu Dairy (02319). It is recommended to focus on the new dairy industry (002946.SZ) and Tianrun Dairy (600419.SH).
Risk warning: risk of consumption recovery falling short of expectations, risk of large cost fluctuations, risk of increased industry competition, food safety risks.
