2022 and 1Q23 results are slightly below our expectations

The company announced 2022/1Q23 results: 2022/4Q22/1Q23, the company achieved revenue of 1,68/499/512 million yuan, +2.75/+4.28/ -9.17% year on year, and achieved net profit of 2.02/0.71/059 million yuan, +0.69/-2.10/ -14.71% year on year. The 2022 and 1Q23 results were slightly lower than our expectations, mainly because sales of high-end rice wine fell short of expectations.

Development trends

The epidemic has had a great impact on the core market in East China, and the company's high-end product sales are under pressure. Among the company's core markets, Shanghai (20.65% of revenue in 2022) was the most affected by the pandemic. 2022 revenue was -8.31% year on year, Jiangsu (10.47% of 2022 revenue) and Zhejiang (29.25% of 2022 revenue) markets performed relatively well, with revenue up slightly by 1.60%/2.88% year-on-year in 2022. Affected by factors such as the slowdown in economic growth, rice wine consumption scenarios were missing and high-end consumption power was damaged. In 2022, the company's high-end wine business revenue/sales/ASP were +0.83/-1.06/ +1.91%, respectively; the regular wine business performed relatively well, with revenue and sales volume/ASP in 2022 +10.25/+9.67/ +0.53% year-on-year ASP, respectively. 1Q23 The company is still under a lot of pressure, with revenue falling 9.17% year on year.

Gross margin came under phased pressure, and the company bucked the trend and increased cost investment. Due to rising costs of raw materials and packaging materials, the company's overall gross margin was -0.52ppt to 35.43% year-on-year in 2022. Among them, the gross margin of mid-range and high-end liquor/ordinary wine was -0.33/+1.58ppt year-on-year to 43.37/ 17.49%, respectively. The company's overall gross margin rebounded slightly in 1Q23, to +1.55ppt to 36.61% year on year. On the cost rate side, the company continues to make efforts to cultivate rice wine consumer groups (cooperate with new media platforms for youthful circle marketing) and shape a high-end brand image (making every effort to build a “only green marble” IP). In 2022/1Q23, the company's sales expenses ratio was +0.34/+2.00ppt to 11.09/ 12.22% year-on-year, and the management cost rate was +0.11/0.60ppt to 6.25/ 5.10% year-on-year.

The nationalization strategy continues to advance, and it is recommended to focus on the company's post-epidemic recovery process. The company continued to develop national investment, added more than 100 dealers in 2022 (55 in the northern market), and established a new North Central Liquor Store in Shenyang, Liaoning. Looking ahead to 2023, the pressure on the company's cost side is slowing down, and an increase in marketing expenses may effectively enhance brand potential. We believe that as the company accelerates sales expansion, compounded by the restoration of post-epidemic rice wine consumption scenarios and the increase in high-end consumption power, the company is expected to achieve a regional breakthrough. It is recommended to pay close attention to the company's post-epidemic recovery process.

Profit forecasting and valuation

Considering that the development of the company's high-end products fell short of expectations, we lowered our 2023 profit forecast by 15.4% to 230 million yuan and introduced the 2024 forecast of 302 million yuan. At the same time, considering the clear consumption recovery trend, we maintained a target price of 10.4 yuan, corresponding to 34.9/31.3x P/E in 2023/24. The current stock price corresponds to 39.8/30.3x P/E in 2023/24, with 3.6% upward space, maintaining a neutral rating.

risks

Other types of alcohol are seizing rice wine market share; high-end competition intensifies; food safety.