3Q20's performance slightly exceeded our expectations.
The company announced 1~3Q20 results: revenue was 681 million yuan, down 10.5% from the same period last year, and net profit was 64 million yuan, down 21.2% from the same period last year. The return to home net profit slightly exceeded our expectations, mainly due to the better-than-expected recovery of mobile sales in major markets.
Trend of development
The epidemic affects the upgrading process of the product structure, and we expect a double-digit decline in sales for the whole year.
Due to the concentrated consumption of yellow rice wine in catering, the company was greatly affected by the epidemic in the first half of the year, but since 3Q20, the catering channels in Jiangsu, Zhejiang and Shanghai markets have improved, the company's sales have improved, and the decline in local income has narrowed. Although the company has stepped up the channel expansion of "Huaiji Mountain 1743" and "Master Lanting", due to the impact of the epidemic, we estimate that the decline of middle and high-end yellow rice wine may still be greater than that of ordinary yellow rice wine, and we expect the epidemic to cause pressure on year-round structural upgrading. structural upgrading will lead to a slow increase in gross profit margin from 2021. However, due to the lack of high-end single products of yellow rice wine, the room for further upgrading of the structure is limited. We expect that after 4Q20 enters the traditional peak season, there will be a more obvious consumption trend, and there may be a low double-digit decline in mid-to-high-end / ordinary yellow rice wine sales throughout the year.
If the company wants to expand the consumer group and scale, it still depends on strengthening the market investment, and it is expected that the sales expense rate will increase slightly year by year in the next three years. Through technical research, the company has improved the pleasure of drinking yellow rice wine and developed new products intended to expand a new consumer group of younger people. However, at present, the overall consumption atmosphere of yellow rice wine is lacking, and we believe that the company needs to continue to increase market investment to cultivate new consumer groups in order to expand the scale. We estimate that the company's sales expense rate may increase slightly in the next three years, which may squeeze the substantial increase in profits to a certain extent in the absence of corporate profitability.
The market in the province continues to decline, and Shanghai may be the main increase in income in the future. The company is based on the internal market of Zhejiang Province and takes Shanghai as the key development market outside the province. The decline in Zhejiang market revenue in the first three quarters was slightly better than that in the whole, and it showed a marked rise in the third quarter, while revenue in Shanghai only fell by 2.55% in the first three quarters. Market revenue in the province has stopped growing since 2018, and we expect that demand in Zhejiang Province will remain flat, with the exception of Shanghai, where revenue may grow slightly, but due to the overall shrinking sales of yellow rice wine and fierce competition from other types of wine, channel expansion and further consumer cultivation are still needed.
Profit forecast and valuation
As the 3Q20 slightly exceeded our expectations, the local market recovery was better than we expected. We raised the profit forecast for 2020 Universe 21 by 13% 12.2% to 1.38 Universe 149m, keeping the target price unchanged at RMB 8.6m. Corresponding to 2020gamma 21, the current share price corresponds to 30.5max 28.4x Pmax E, and the target price has 1.2% upside space, maintaining the neutral rating.
Risk.
If the impact of the epidemic persists, the recovery of mobile sales will be slower than expected; if revenue in Zhejiang, a niche market, continues to decline, there will also be pressure on expansion outside the province.