Performance review
2019 results are in line with our expectations
The company announced its 2019 results: revenue of 1,171 million yuan, net profit of 166 million yuan, deduction of non-net profit of 127 million yuan, a decrease of 23.11%; of these, 4Q19 revenue was 4.1 billion yuan, a decrease of 0.9%, and Guimu's net profit was 85 million yuan, an increase of 11.2%. Revenue and net profit deducted were in line with our expectations. The net profit of the mother exceeded our expectations mainly because other income (mainly the demolition subsidy and tax return of the new Huashe plant) exceeded our expectations.
Development trends
The company continues to actively upgrade its product structure, and it is expected that there will be room for a slow increase in profitability in the next three years. In 2019, the company drastically cut its product line, making it clear that “Huijishan 1743” is an upgraded model of the large single product “Pure 5 Years”. It was promoted nationwide to meet the drinking needs of mid-range consumers. At the same time, the company launched the ultra-high-end “Master Lan Ting” to drive brand strength. We expect there is room for improvement in the company's gross profit margin (excluding taxes and surcharges) in the next three years, but we think that in a situation where the rice wine industry lacks a high reputation, there is limited room for further structural upgrades, and the return of rice wine value will still require long-term investment.
We believe that the company's top priority is still to increase market investment to expand revenue scale, especially channel expansion and construction. Currently, the company is increasing sales expenses in the right direction. The company still insists on Zhejiang as its base, Shanghai as a key market outside the province, and is steadily expanding to Anhui and other places. In 2019, Shanghai's revenue increased 15.4% year-on-year. Relying on the “Woolen Hat” brand and channels, we anticipate that revenue in the Shanghai market will expand further. In 2019, the company sorted out channels, integrated small businesses, enhanced dealer status, and increased channel cost investment. In 2019, the company's sales expenses increased 15% year-on-year, and the sales expense ratio increased by 2ppt to 13.7%. We believe that the company wants to bring about scale growth through increasing market investment. The direction is right. It is expected that the company's sales expenses ratio will continue to grow in the future.
We believe that the impact of the epidemic on the company may continue until 2H20, and the pressure to upgrade the structure and increase sales volume throughout the year is strong. The high-end rice wine drinking scene is mainly dining. Currently, dine-in in restaurants in Zhejiang has returned to about 50% of the same period. We anticipate that normal drinking parties will not gradually resume until 3Q20. We estimate that in a neutral situation, the company's sales volume may drop by a low single digit throughout the year.
Profit forecasting and valuation
Considering the impact of the pandemic and the increase in sales expenses in 2021, we lowered our profit forecast for 2020/21 by 3.1/7.3% to $153/150 million. Due to the upward shift in the valuation center, we kept the target price unchanged at 8.6 yuan. Corresponding to the 2020/21 27.9/28.5 X P/E, 1.29/1.26X P/B, the current stock price corresponds to 2020/21 24.5/25X P/E, 1.14/1.11X P/B. The current stock price has 14% room to rise compared to the target price, maintaining a neutral rating.
risks
If the impact of the epidemic continues, sales will recover more slowly than expected; if Zhejiang's revenue in the niche market continues to decline, there will also be pressure for expansion outside of the province.