Changyu announced its quarterly report for the 3rd quarter of 2023. 1-3Q23 achieved revenue of 2.80 billion yuan, a year-on-year decrease of 0.4%, net profit of 420 million yuan, a year-on-year decrease of 2.3%, and net profit of non-return net profit of 380 million yuan, a year-on-year decrease of 8.1%.

The 3Q23 company's revenue and net profit were $830 million and $0.6 billion respectively, down 2.7% and 19.7% year-on-year respectively. 3Q23 deducted non-return net profit of $500 million, down 19.4% year on year. As of the end of the third quarter, the company's contract debt was 170 million yuan, an increase of 0.4 billion yuan over 1H23.

Key points to support ratings

Industry demand was under pressure, and revenue for the third quarter fell 2.7% year over year. (1) The revenue of 1-3Q23 company was 2.80 billion yuan, down 0.4% year on year. Among them, the 3Q23 revenue growth rate fell 2.7% year on year. The year-on-year decline in revenue in the third quarter was mainly affected by the external industry environment. Against the backdrop of a continuous decline in industry size and weak consumption, domestic red wine was clearly squeezed by liquor and imported wine. According to the equity incentive target previously announced by the company, the company's revenue target for 2023 is 4.33 billion yuan, an increase of 10% over the previous year. Judging from the situation in the third quarter, there is some pressure to achieve the target. (2) In terms of wine, we judge that the 100-300 yuan large single product, Jiebaina, undertook the demand for the previous low-end dry red upgrade, and revenue is expected to increase slightly in the first 3 quarters. High-end wineries and wines were affected by the slow recovery in commercial consumption, which was basically the same or slightly lower than the previous year.

According to the tonnage price data disclosed in the company's semi-annual report, 1H23 wine sales fell 7.8% year on year, and tonnage prices increased 6.6% year on year. We judge that low-end dry red sales declined significantly in the first three quarters, thus reducing the overall revenue performance of the wine sector. (3) In terms of brandy, we judge that the share of high-end cognac brandy continues to rise, but considering that the brandy audience is still mainly in coastal regions, affected by changes in the local consumption environment, it is expected to be basically the same year on year in the first three quarters. (4) As of the end of the third quarter, the company's contract debt was 170 million yuan, an increase of 36.86 million yuan over 1H23, up from 9.72 million yuan in the same period last year.

3Q23 gross margin increased 2.7pct year on year, and net profit margin after deducting non-refundable net margin fell 1.4pct year on year. (1) The gross profit margin of 1-3Q23 was 59.1%, up 1.6 pct year on year. Among them, the gross profit margin of the 3Q23 company was 59.1%, up 2.7 pct year on year. The increase in gross margin was mainly due to the continuous upgrading of the product structure and the increase in the share of middle and high-end products. (2) In terms of expense ratio, the 3Q23 company's sales expense ratio was 27.9%, which was basically the same as year on year. The management expense ratio increased by 2.4 pct to 10.6% year on year. The increase in the management expense ratio was related to the company's implementation of restrictive equity incentives and amortization of equity incentive expenses. The financial expense ratio was basically the same as the previous year. The 3Q23 corporate tax and surcharges ratio was 8.3%, down 0.2pct year on year, income tax rate 39.9%, up 7.2 pct year on year, mainly due to reduced corporate profits and centralized income tax payment cycle. In 3Q23, the company deducted 6.6% of non-return net profit, a year-on-year decrease of 1.4pct.

valuations

The company's introduction of restricted equity incentives can effectively boost internal momentum, while actively deploying digital marketing and focusing on emerging channels. The company's short-term performance is under pressure due to the impact of the industry environment, but the long-term positive trend has not changed. Based on the company's performance in the first three quarters and considering the current weak alcohol sales environment, we lowered our previous profit forecast. We expect the company's EPS for 23-25 to be 0.70, 0.80, and 0.89 yuan/share, respectively, up 12.6%, 14.8%, and 10.8% year on year, maintaining the “buy” rating.

The main risks faced by ratings

The pressure on liquor and imported alcohol exceeded expectations. The company's own reforms fell short of expectations.