The Zhitong Finance App learned that Fangzheng Securities released a research report to maintain the “Recommended” rating of Zhonghu Hi-Tech (600872.SH). The bank pointed out that the company is in the early stages of reform, and policy and personnel adjustments have led to phased fluctuations. As the reform progresses steadily, internal efficiency continues to be optimized, and profitability is expected to continue to improve. Furthermore, the target of the company's incentive plan is significantly higher than the growth rate of previous years. The subsidiary Delicious Food has implemented a strategic plan for the next three years, and the high target shows the company's confidence in development.

Incident: The company released its 2023 annual report. In 2023, the company achieved operating income of 5.139 billion yuan, a year-on-year decrease of 3.78%; realized net profit of 1,697 million yuan; and realized net profit withheld from non-mother of 524 million yuan, a year-on-year decrease of 5.79%. Among them, Q4 achieved revenue of 1,186 billion yuan, a year-on-year decrease of 14.37%; realized net profit of 2,969 billion yuan; and realized net profit deducted from non-mother of 61 million yuan, a year-on-year decrease of 60.02%.

The main views of Fangzheng Securities are as follows:

In the early days of the reform, operations were under pressure for a short time, and the core categories remained steady. In 2023, the company achieved revenue of 5.139 billion yuan, -3.78% year-on-year. Among them, the company's revenue for each quarter of 23Q1-Q4 reached 13.67/12.88/ 12.99/1,186 billion yuan, respectively, +1.46%/-1.36%/-0.38%/-14.37%. Among them, Q4 revenue is under pressure in the short term. We expect that the main company is in the early stages of reform, with phased fluctuations due to policy and personnel adjustments, and it is expected to go light in 2024.

By product, in 2023, Delicious Fresh achieved sales revenue of 4.932 billion yuan, -0.45% year-on-year, and realized net profit of 599 million yuan, +3.04% year-on-year. In 2023, the company achieved operating revenue of 30.28/ 6.76/4.46/ 716 billion yuan respectively, or +0.1%/+13.4%/-10.6%/-6.8% compared with the same period last year.

By region, the East/South/Midwest/North region achieved revenue of 11.16/20.34/10.80/636 billion yuan in 2023, +2.9%/+4.3%/+12.0%/-8.2% over the same period. The company continued to make up for the channel shortcomings of “strong in the south, weak in the north, and weak in the east and west”, focusing on developing the central and western markets, and continuously deepening the old market.

By channel, in 2023, the company's distribution/direct sales achieved revenue of 4.727/139 million yuan respectively, +0.1%/-16.8% compared with the same period last year. By the end of the 2023 reporting period, the number of the company's dealers was 2,084, with 220 new dealers, with a net increase of 81 dealers; among them, the number of dealers in the East/South/Midwest/North regions was 398/327/581/778, a net increase of 1/9/42/29. While maintaining old customers, the company developed a number of high-quality new customers and continued to promote channel development.

Profits are under phased pressure, and profitability is expected to continue to improve in the future. In 2023, the company achieved net profit of 524 million yuan, or -5.79% year-on-year. Among them, the company's net profit after deduction for each quarter of 23Q1-Q4 reached 1.44/1.52/1.67/ 0.61 billion yuan, respectively, -7.09%/+3.79%/+64.10%/-60.02% year-on-year. The company achieved gross margin/non-net profit margin of 33.14%/5.16% in 23Q4, +1.49/ -5.89pcts year-on-year. Among them, profit margins declined in 23Q4, and we expect that this is mainly due to an increase in personnel placement and other expenses in the early stages of the reform. Along with the steady progress of reforms, internal efficiency continues to be optimized, and profitability is expected to continue to improve. The company's 23Q4 sales/management/R&D expenses rate was 10.66%/11.16%/3.75%, with a year-on-year change of +0.73/ +5.83/+0.14pcts, and the 2023 sales/management/R&D expenses ratio was 8.90%/7.34%/3.52% respectively, with a year-on-year change of +0.05/+1.28/+0.18pcts, and the overall cost ratio remained stable.

Equity incentives highlight confidence in development and continuously stimulate employees' enthusiasm. The company released the 2024 Restricted Stock Incentive Plan (draft). The equity incentive targets mainly cover company executives, middle management and other core key employees. It will further establish and improve the company's long-term incentive and restraint mechanism to motivate management and core key talents. The assessment year is 2024-2026. The assessment target is based on 2023. The target for the unlocking period is (1) 2024/2025/2026 revenue growth of not less than 12%/32%/95%, respectively, that is, the year-on-year revenue growth rate is not less than 12%/18%/48%. (2) The operating profit margin is not less than 15%/16.5%/18%. (3) Return on net assets is not less than 14%/15.5%/20%. The total amortization expenses were 176 million yuan, and the 2024/25/26/27/28 five years were amortized 4145/6217/4462/2219/512 million yuan respectively. The incentive plan was comprehensively examined from the three dimensions of revenue, operating margin, and return on net assets, and the target was significantly higher than the growth rate of previous years, fully demonstrating the company's confidence in long-term high-quality development.

The three-year strategic plan has been implemented, and we look forward to the company's accelerated growth. The company announced the strategic planning plan for the next three years for its subsidiary Delicious Fresh. Delicious Fresh's 2026 revenue target is 10 billion yuan, operating profit target is 1.5 billion yuan, and a 3-year CAGR is 27%. The high target shows the company's confidence in development. Since the new management team took office, the company's reforms have been accelerated, and reforms have continued to be promoted through channel adjustments and supply chain optimization. Furthermore, market-based incentives are expected to stimulate sales and employee motivation and support performance growth. Along with the continuous deepening of reforms, the dividends of the company's reform are expected to be gradually realized, and the company is expected to grow at an accelerated pace.

Risk warning

Macroeconomic downside risks, industry demand falling short of expectations, rising costs exceeding expectations