Incident: The company released its 2023 annual report. In 2023, the company achieved total operating income of 5.378 billion yuan, +9.13% year over year; net profit to mother of 624 million yuan, +4.22% year over year; net profit after deducting non-return to mother of 557 million yuan, +4.63% year over year. According to estimates, 23Q4 achieved total operating income of 827 million yuan, +1.16% year over year; net profit to mother of 20 million yuan, 22Q4 was 0.28 million yuan; 23Q4 net profit of non-return to mother was 47 million yuan, and 22Q4 was 0.06 million yuan.

The sales performance is superior to the industry, and continuous optimization of the product structure drives the increase in tonnage prices. In 2023, the company's sales volume reached 1.4028 million kiloliters, +4.79% year-on-year (vs. 0.3% year-on-year increase in production according to industry regulations). On the structural side, the revenue of mid-range/popular products was -3.59%/+5.32%, respectively, accounting for -3.48/ -0.2pct year on year, while the revenue of high-end products increased 15.12% year over year, accounting for +3.68pct year on year, and sales increased 15.96% year on year. It is expected that Daisheng 97 will maintain good growth based on the expansion of catering channels. Improved product structure led to a steady increase in the company's tonnage price, +3.76% year-on-year. By region, the core market revenue in South China was +10.5% YoY, the market base continued to be consolidated, and the revenue in other regions was -12.2% YoY. By channel, revenue from regular/supermarket/nightclub/e-commerce channels in 2023 was +7.92%/+38.51%/+13.32%/+17.74%, respectively. The company actively expanded downstream channels. At the end of '23, the number of dealers reached 1,471, a net increase of 270 over '22, with a net increase of 152 in Guangdong. In 23Q4 alone, the company's sales volume was +4.04% year over year, and the tonnage price declined slightly by -2.76% year over year. It is expected that due mainly to the impact of the 22Q4 public health incident, there will be savings on expenses such as discounts, and 23Q4 fee payments will return to normal.

Tonnage prices improved hedging cost pressure, and gross margin increased steadily. In 2023, the company's beer business tonnage cost was +3.7%, of which raw material tonnage cost was +5.3% YoY, and direct labor/depreciation/energy tonne costs were -0.5%/-11.3%/+0.9%, respectively. Thanks to the increase in tonnage prices, the company's gross margin reached 42.82% in 2023, +0.38pct year-on-year. On the expense side, the company's sales/management/finance/R&D expense ratios in 2023 were +0.23/+0.53/+1.21/-0.56pcts, respectively. The large increase in financial expense ratio was mainly due to a decrease in interest income. Overall, the net interest rate after deduction for 23 years was 10.36%, -0.45pcts year over year. In 23Q4 alone, the company's gross margin was 7.4pct year on year, sales/management/ financial/ R&D expenses were +1.51/+1.43/+1.45/ -0.95pct year on year, after deducting non-net profit margin -6.44pct year on year.

Investment advice: Optimistic about high-end trends & cost flexibility in the short term, and focus on expansion outside the province in the medium term. On a short-term basis, pure products are growing rapidly, driving the company to maintain good volume and price performance. At the same time, it is optimistic that the company's barley purchase price will improve marginally in 2024, and profitability is expected to increase. On a medium- to long-term perspective, the company already has high brand awareness and influence in South China. The company has launched a nationwide investment promotion for the Pearl River Puree Experience Store to create a brand image window, gradually radiate the national layout with the provincial market as the center, and can be expected to expand the market outside the province. We expect the company's 2024-2026 revenue to be $58.19/62.44/6.643 billion yuan, respectively, up 8.2%/7.3%/6.4% year on year, net profit to mother of 741/8.46/ 955 million yuan respectively, up 18.8%/14.2%/13.0% year on year. The PE corresponding to the current market value is 23/20/18X respectively, maintaining the “recommended” rating.

Risk warning: fluctuating raw material prices, increased competition for middle and high-end beer, food safety issues, etc.