Incident: On January and April 2, Kweichow Moutai released the “2023 Annual Report”. The company achieved annual revenue of 147.694 billion yuan, up 19.01% year on year; realized net profit of 74.734 billion yuan, up 19.16% year on year; basic EPS of 59.49 yuan/share, up 19.16% year on year; weighted average return on net assets of 34.19%, up 3.93 pct year on year.

2. Recently, the price of the company's core product, Flying Moutai, has dropped a lot in the short term, causing market fluctuations and widespread attention.

The performance exceeded expectations, maintained strong momentum, and the quality of growth was high. Q4 The company achieved operating income of 44.425 billion yuan, an increase of 20.3% over the previous year, and achieved net profit of 21,858 billion yuan, an increase of 19.3% over the previous year.

The 2024 Spring Festival was late, and the company maintained a high growth rate in Q4. Among them, the year-on-year increase in revenue of more than 20% was the highest in the same period since 2019. The company's gross margin/net margin for the year was 91.96% and 52.49%, respectively, +0.09 and -0.19 pct, respectively, and remained stable overall; in terms of cost ratio, the sales expense ratio increased by 0.50 pct to 3.09% year on year, the highest since 2020, mainly due to an increase of 753 million (+26.1%) in advertising and market development expenses over the previous year. Net cash flow from operating activities for the year was 66.593 billion yuan, and year-end contract liabilities were 14.126 billion yuan, which remained stable.

The Matthew effect is an extreme interpretation, focusing on changes in the industry pattern and scarce growth targets. According to data from the wine industry, in 2023, the total sales revenue of soy wine nationwide was 230 billion yuan, an increase of 20 billion yuan over the previous year; in the same year, Kweichow Moutai's sales revenue reached 147.2 billion yuan, an increase of 23.4 billion yuan over the previous year. In terms of size, the company accounts for more than 60% of the soy wine industry, and incrementally, the company almost represents the growth of the industry. Maotai's 1935 single product sales surpassed 10 billion dollars in the two years since its launch. It is the “miracle of the industry” that has received the most attention in the past two years. The Matthew effect is an extreme interpretation. Maotai's initiative will increase the division of the industry, and growth space may accelerate towards a few leading brands.

The volume of Maotai liquor increased steadily, the structure of the series was upgraded, and marketing reforms continued to be deepened. By product, in 2023, Maotai liquor sold 126.589 billion yuan for the whole year, up 17.4% year on year; other wine series sold 20.630 billion yuan for the whole year, up 29.43% year on year. The sales volume of Maotai liquor increased 11.1% year on year, and the tonnage price increased 5.7% year on year; sales of other wine series increased 2.9% year on year, and the tonnage price increased 25.7% year on year. By channel, in 2023, the annual revenue of wholesale agents was 79.986 billion yuan, up 7.5% year on year; direct sales revenue was 67.233 billion yuan, up 36.2% year on year. Among them, i Maotai achieved sales of 22.374 billion yuan, an increase of 88.3% year on year, and gross margin reached 96.09%. The company's direct sales accounted for 45.7%, a further increase of 5.8 pcts over the previous year.

Maintaining 15% central growth in 2024 is highly certain, and focus on subsequent price movements. According to the Maotai production process requirements, the production volume of Moutai wine and series wine increased by 0.51% and 22.28%, respectively, in 2019, corresponding to the increase in sales of the series wine this year; after a lapse of five years, the company raised the factory price of Kweichow Moutai by 53% vol in November 2023, with an average increase of 20%. There is a basis for maintaining the expected growth in overall performance this year. Due to the year-on-year increase of 0.63% and 0.78% year-on-year decrease in production of Maotai liquor in 2020, the potential for volume growth in 2025 is relatively limited, and the proportion of direct sales has reached a high level. It is expected that the company will make a difference in price in the future. Recently, the 375ml Xunfeng Maotai Liquor launched by the company and the 100ml Maotai Liquor launched earlier are all priced at nearly 2,000 yuan when converted to 500ml.

The relationship between supply and demand determines the value base. There is no need to worry too much about the company's own growth. It is recommended to pay more attention to the impact of company dynamics on the industry. According to First Finance, the price of the company's core product, Feitian Moutai, has recently dropped a lot in the short term, causing market fluctuations and widespread attention. The main reasons are the following: 1) Liquor consumption has entered a low season, and prices have naturally declined; 2) this year's sales pace is slightly faster than previous years, and short-term supply and demand relationships have changed; 3) 375ml Xunfeng Moutai was launched through other channels, causing price comparisons; 4) Concerns about the impact of economic expectations on demand. The company actively spoke out to quickly calm the turmoil. Currently, the price of Flying Sky has clearly rebounded. This week's market shows that the impact of the storm on other wine companies is greater than that of Maotai itself. We believe that 1) the main premise of the relationship between supply and demand will not change; 2) the company has the will and ability to achieve price stability; 3) the company is still the most definitive target for growth in the industry.

Against the backdrop of a low share of soy wine production and the company's top brand ranking, the basic state of tight supply and demand for Flying Moutai will not change in the short to medium term. In the past few years, affected by factors such as the epidemic and the launch of i-Maotai, there have also been significant short-term price fluctuations. All of these have changed due to changes in market expectations. Since then, as expectations have stabilized, prices have steadily rebounded. Expectations are mainly affected by the investment demand of scalpers. Stable profit margins and stable teams of dealers are the core forces of price stability. Since taking office, the new management has proven that it can coordinate the achievement of performance growth, the stability of market expectations, and the return of consumer attributes. The Maotai Group Party Committee (expanded) meeting held on April 9 said that regional party building, a game of chess, terminal construction, etc. are progressing in an orderly manner, market performance is in line with expectations, the main goals for the first quarter were off to a good start, and key tasks were off to a good start. The company is not only the most definitive cornerstone of the industry, but also exerts its dynamism to become an influence on the industry. There is no need to worry too much about the company's own growth; it is recommended to pay more attention to the impact of company dynamics on the industry.

Investment advice: The company focuses on the strategic goals and tasks of “double doubling, double consolidation, and double construction” of the group company, and maintains a good trend of steady progress, steady progress and improvement in various business indicators. As a representative of high-end famous wines, the company has unique brand potential. It has shown excellent performance stability and market influence during the industry adjustment period, and is expected to benefit from the structural development opportunities brought about by high-end and flavor dividends in the long term. Under the leadership and reforms of the new management, the company continues to undergo positive changes. We predict that the company's 2024-2026 EPS will be 69.80, 80.94, and 94.68 yuan/share. The PE multiples corresponding to the current stock price are 23.4x, 20.2x, and 17.3x, maintaining a “buy” rating.

Risk warning: Price trends fall short of expectations; new product promotion falls short of expectations; sales fall short of expectations; food safety issues; risk of market fluctuations; consumption tax policies may change.