2022 and 1Q23 performance fell short of our expectations

The company announced 2022/1Q23 results: 2022/4Q22/1Q23, the company achieved revenue of 39.19/11.08/1,131 million yuan, year-on-year -0.86/-13.57/ -2.96%, and achieved net profit of 4.29/-0.06/277 million yuan, -14.28/-111.68/ -4.75% year-on-year. The 2022 and 1Q23 results fell slightly short of our expectations, mainly because wine and brandy sales fell short of expectations.

Development trends

The company adheres to the high-end strategy and continues to push forward the reform of its business division. Affected by factors such as slowing macroeconomic growth and repeated epidemics, the wine and brandy consumption scenario in 2022 was blocked, and the industry has been hovering in a trough for a long time. The company continued its “focus on the middle and high-end, focus on high quality, focus on big products” strategy and continued to push forward the reform of the division (Dragon Ball Division continues to develop group buyers and consumers and develops Dragon series products; the winery wine division increased its marketing efforts, etc.). The overall company performance was slightly superior to the industry but was still under pressure. The company's wine business revenue/sales/ASP in 2022 was +0.26/-3.19/ +3.56% year-on-year; the impact on the brandy business was slightly deeper, with 2022 revenue/sales/ASP respectively -7.4.37/-7.37/-7.37/ASP year-on-year 84/+ 3.76% In 1Q23, due to the impact of COVID-19, the company's revenue continued to fall 3% year on year in January, but we think the year-on-year decline in a single quarter has narrowed marginally, and the marginal trend is improving.

Premium may relieve some of the cost pressure, but the gradual pressure on gross margin may continue. Due to rising costs of raw materials and packaging materials, 2022/1Q23 gross margin was -1.21/-3.91ppt year-on-year to 57.11/ 58.75%. Among them, the gross margin of wine/brandy in 2022 was -2.74/-1.59ppt year-on-year to 56.76/ 58.99%, and gross margin pressure increased. The cost rate side remained stable. In 1Q23, the company's sales expenses rate/management expenses ratio was -0.49/ +0.19ppt compared to 18.11/ 5.86%. Looking ahead to 2023, we think the company's gross margin may continue to be under pressure, while active control of expense ratios may drive profit growth slightly faster than the revenue side.

The company introduced equity incentives to boost momentum and look forward to a gradual recovery in performance throughout the year. The company launched the 2023 Restricted Stock Incentive Plan. It plans to grant 1% of the total share capital to the incentive target, at a grant price of 15.69 yuan per share. The target is revenue of no less than 43/47/51 billion yuan in 2023-2025, an increase of 10.5/9.1/8.3%, net profit of no less than 5.0/5.3/560 million yuan, an increase of 18.1/5.5/ 5.3%. We believe that this incentive plan can effectively boost momentum and help companies seek market breakthroughs in difficult times.

Profit forecasting and valuation

As the overall recovery in consumption power was slower than expected, we lowered net profit in 2023 by 22% to 490 million yuan, and introduced the 2024 forecast of 580 million yuan. However, the promotion of equity incentives drives sentiment to a positive valuation, so we maintain a target price of 27.6 yuan for A shares, corresponding to 2023/24 38.4/32.4x P/E. The current stock price corresponds to 2023/24 45.3/38.1x P/E, with 15.2% downside, maintaining a neutral rating; maintaining the target price of B shares at HK$13, corresponding to 15.4/13.0x P/E in 2023/24. The current stock price corresponds to 14.2/11.9x P/E in 2023/24, with an increase of 8.9% Space to maintain outperforming industry ratings.

risks

Other types of wine are squeezing the wine market, market input and output are uncertain, the risk of fluctuations in raw material costs, etc.