Key takeaway

The company's revenue and profit in 2Q26 significantly beat expectations. Products across all price points recorded positive growth in 2Q26. The company's channel inventory in 2Q26 may have declined QoQ, while sell-through in July and August may have already returned to growth. Revenue in central Jiangsu and Yancheng increased in 1H26, while the revenue contribution from markets outside Jiangsu remained above 10%. In addition, the company's gross margin improved in 1H26 due to cost controls, while tighter budgets lowered the expense ratio and boosted the net margin. We believe the company may have reached an upward inflection point in the cycle. We expect the company to maintain revenue of RMB10bn in 2026. We highlight its investment value at the cyclical inflection point and reiterate our recommendation.

Event

The company released 1H26 earnings results In 1H26, the company's total revenue/net profit attributable to shareholders of the parent company was RMB6.436bn/RMB2.082bn (-7.41%/-6.6%). In 2Q26, total revenue/net profit attributable to shareholders of the parent company was RMB2.113bn/RMB697mn (+14.11%/+19.17%). Revenue and earnings in 2Q26 significantly beat consensus.

Quick Take

Products across all price points in 2Q26 recorded positive growth, signaling the arrival of an upward cyclical inflection point

1) In 1H26, revenue from the Special A+/Special A categories was RMB3.743bn/RMB2.307bn (-13.19%/+3.36%), respectively. The revenue contribution from the Special A category increased by 3.95 pcts to 36.38%.

2) In 2Q26, revenue from the Special A+/Special A categories was RMB1.298bn/RMB683mn (+13.58%/+17.26%), respectively. Their revenue contributions changed by -0.82/+0.62 pct, respectively. Products across all price points recorded double-digit growth in 2Q26, mainly because sell-through stabilized and recovered from a low base. Danya, a mass-market product, delivered the strongest performance. We believe the company's channel inventory at the end of 2Q26 declined slightly from the end of 1Q26. Sell-through increased YoY in July and August from a low base. The company may have reached an upward inflection point in the cycle.

Revenue in central Jiangsu and Yancheng increased in 1H26, while the revenue contribution from markets outside Jiangsu remained above 10%

1) In 1H26, revenue in/outside Jiangsu changed by -9.36%/+7.18%, while the revenue contribution from markets outside Jiangsu increased by 1.49 pcts to 10.61%. Revenue in Huai'an/Nanjing/southern Jiangsu/central Jiangsu/Yancheng/Huaihai/markets outside Jiangsu changed by -4.05%/-16.89%/-17.89%/+3.50%/+1.39%/-23.50%/+7.18%, respectively. Revenue in the central Jiangsu and Yancheng regions returned to growth in 1H26, while the revenue contribution from markets outside Jiangsu remained above 10%.

2) In 2Q26, revenue in/outside Jiangsu increased by 14.27%/21.73%, while the revenue contribution from markets outside Jiangsu increased by 0.61 pct to 11.19%. All markets recorded positive growth in 2Q26.

3) In 1H26, the number of distributors in/outside Jiangsu changed by +16/+91. In 2Q26, the number of distributors in/outside Jiangsu changed by +27/+47. We believe the company's major distributors in Jiangsu remained stable. New distributors in the province were mainly distributors of smaller product lines and group-purchase distributors, while distributor recruitment outside Jiangsu accelerated.

Gross margin improved through cost controls, while expense ratios declined amid tighter budgets

1) Profitability: In 26H1, gross margin/net margin increased by 0.74/0.28 pcts YoY to 74.14%/32.35%; in 26Q2, gross margin/net margin changed by +0.81/+1.40 pcts YoY to 73.62%/32.98%. The strong gross margin was likely driven mainly by lower costs for certain core products and effective cost controls.

2) Expense ratios: In 26H1, the selling expense ratio/administrative expense ratio changed by -0.32/-0.17 pct YoY; in 26Q2, the selling expense ratio/administrative expense ratio changed by -5.07/-1.27 pcts YoY. The decline in selling expense in 26H1 was mainly attributable to a 12.66% decrease in advertising expense and a 17.64% decrease in integrated promotional expense, as the company tightened its expense budget this year.

3) Advances from customers: In 26H1, contract liabilities increased by RMB243mn YoY to RMB1.708bn, but decreased by RMB718mn QoQ from 26Q1. Some advances received in Q1 were recognized in Q2.

4) Cash flow: Operating cash flow increased by 50.31% YoY in 26H1, and operating cash flow decreased by 41.33% YoY in 26Q2.

Earnings forecast and investment recommendation: The company is expected to achieve revenue of RMB10.284bn, RMB10.925bn, and RMB11.724bn in 2026–2028, representing YoY growth of +1.02%, +6.23%, and +7.31%, respectively; net profit attributable to shareholders of the parent company is expected to reach RMB2.613bn, RMB2.807bn, and RMB3.031bn, representing YoY growth of +0.37%, +7.40%, and +7.98%, respectively; corresponding EPS is expected to be RMB2.10, RMB2.25, and RMB2.43, respectively; corresponding P/E multiples for 2026–2028 is expected to be 14.35X, 13.36X, and 12.37X, respectively.

Risks: Household demand recovery may fall short of expectations. In the past 2 years, economic growth has slowed due to macroeconomic factors, and household income growth has also been affected. The pace of short- to medium-term household income growth and consumer spending power recovery may not meet expectations. Slower-than-expected economic recovery: If the company's cash flow recovery is slower than expected, the resurgence in demand for the company's products in business catering scenarios may be slower than expected. Food safety: In recent years, food safety has always been the focus of consumers. Although the company in the food industry has continuously improved produ ction quality control levels, since it involves many links and enterprises, there are still food quality and safety risks. Abnormal stock price fluctuations. Changes in the capital market sentiment or expectation towards the company may lead to abnormal stock price fluctuations.