Incidents. In 2023, the company achieved operating income of 4.38 billion yuan, an increase of 11.9% year on year; net profit to mother was 530 million yuan, an increase of 24.2% year on year; net profit after deducting non-return to mother was 450 million yuan, an increase of 12.1% year on year. 23Q4 achieved operating income of 1.58 billion yuan, an increase of 42.9% over the previous year; net profit due to mother was 110 million yuan, which turned a significant year-on-year loss into profit (22Q4 loss of 5.67 million yuan); net profit not attributable to mother was 84.86 million yuan (22Q4 was 1.44 million yuan). The company plans to distribute cash dividends at a ratio of RMB 5 (tax included) for every 10 shares, with a dividend rate of about 65%.

The leading position of wine has stabilized, and the volume and price of brandy has risen sharply. In '23, the company's alcohol revenue was +12.0% YoY to 4.29 billion yuan, sales volume +2.7% YoY to 96,000 tons, and tonnage price +9.0% YoY to 45,000 yuan/ton. By product, wine/brandy revenue was +10.5%/+16.3% to RMB 31.4/1.15 billion yuan, sales volume +0.2%/+8.8% YoY to 6.6/30,000 tons, and average price +10.2%/+6.9% YoY to 48/39,000 yuan, with remarkable high-end results. Overall demand in the wine market was sluggish and competition was intense in 2023. The number of regulated companies decreased by 15 to 104, wine imports/imports (USD) fell 25.9%/18.7% year on year, and the decline narrowed to 8.7%/14.4% in January-January '24. Although the signs of wine recovery are still unclear, the company is firm in its high-end strategy, focusing on circle marketing, increasing its market share around the banquet scene; increasing the promotion of cognacs such as Coya in the Shandong and Guangdong regions to create a second growth curve.

Increase investment in marketing, and gross margin contribute to performance growth. During the reporting period, the company's gross margin was +2.1pct to 59.3% year-on-year, of which wine/brandy gross margin was +2.4/+1.1 pct to 59.0%/60.1%, respectively. By region, the gross margin of mainland China/foreign countries was +0.8/+7.9pct to 62.4%/40.1%, respectively, with a significant increase overseas. The 23-year sales expense ratio was +2.0pct to 28.3%. Among them, marketing expenses increased by 52.1% to 490 million yuan, and management expenses and financial expenses ratio were -0.4/+0.1pct to 6.9%/0.3%, respectively. Taken together, the company's net profit margin was +1.2pct year-on-year to 12.1%.

Further improve the sales division system and implement profit-oriented equity incentives. The company strengthens profit-oriented performance evaluation, deepens division system construction, and continues to promote circle marketing, banquet promotion and digital transformation. The number of the company's dealers increased net in '23 by 146 to 5059, with a net increase of 41/105 in mainland China/Taiwan, Hong Kong, Macao and overseas. The average revenue of dealers was +12.2%/-11.2% year-on-year. According to the calculation of restricted stock incentive targets, the company's revenue for 24-25 was not less than 47.2/5.11 billion yuan, and net profit was not less than 54/570 million yuan, and the certainty of achieving the target is high.

Investment advice and profit forecasting. We expect the company's 24-26 revenue to be 47.4/51.2/5.47 billion yuan respectively (the original 2024-25 forecast was 4.55/ 4.97 billion yuan), net profit to mother of 6.0/6.7 (originally 5.9/6.9) /7.3 billion yuan, respectively, and corresponding EPS of 0.87/0.96/1.06 yuan, respectively. Referring to the 2024 average valuation of comparable companies, considering the recent decline in the overall valuation of the alcohol sector, the company, as a leader in the domestic wine industry, has implemented significant results such as stock incentives and organizational structure reforms, and the brandy category still has some room to expand domestically in the future, giving the company 32x PE in 24 years (originally 45x in 2023). The target price was lowered from 35 yuan to 28 yuan, maintaining the “superior to the market” rating.

Risk warning: economic downturn, fluctuating raw material prices, food safety