The company announced the 2023 annual report and the first quarter report of 2024. In 2023, the company achieved total operating revenue of 3.244 billion yuan, +25.85% year over year, and realized net profit of 809 million yuan, +55.28% year over year. In the fourth quarter of 2023, the company achieved total revenue of 807 million yuan, -14.90% year-on-year; realized net profit of 144 million yuan, or -33.37% year-on-year. In the first quarter of 2024, the company achieved total operating income of 802 million yuan, +5.51% year on year; realized net profit of 169 million yuan, -9.80% year over year; realized net profit without deduction of 161 million yuan, -13.79% year on year.

Revenue growth on a high base slowed in the fourth quarter of 2023, and revenue returned to positive growth in the first quarter of 2024. In 2023, the company's pre-adjusted cocktail revenue was 2.88 billion yuan, +27.8% year-on-year. Of these, pre-prepared cocktail revenue for the first three quarters was 2.170 billion yuan, +54.9% year-on-year. Mainly due to strong core products and continued sales volume, which led to rapid revenue growth. In the fourth quarter of 2023, revenue from pre-prepared cocktails was 710 million yuan, -16.8% year-on-year. The main reasons include: 1) the popularity of the company's strong product network surged in October 2022, so the revenue base rose in the fourth quarter; 2) against the backdrop of a weak recovery in consumption, demand for Qiangshuang products weakened as an optional consumer pre-packaged cocktail product. In the first quarter of 2024, revenue from the pre-adjusted cocktail business was +5.7% year-on-year, mainly benefiting from marketing activities boosted strong brand potential and slight growth after product packaging was replaced in the second half of 2023.

Increased spending in the first quarter of 2024 led to a decline in profit margins. In 2023, the company achieved a gross profit margin of 66.7%, +2.9 pct compared to the previous year, mainly due to the increase in the share of high gross margin products, marginal cost improvement, and the increase in capacity utilization due to strong and rapid deployment. The annual sales expense ratio, management cost rate, and R&D expense ratio were -2.4/-0.7/-0.1 pct, respectively, which mainly benefited from rapid revenue growth brought about economies of scale. The net profit margin for the year was +4.7pct year-on-year to 24.8%. In the first quarter of 2024, gross margin continued to improve, but profitability weakened due to a sharp increase in the expense ratio. Among them, the sales expenses ratio was +8.8 pct compared to the same period, mainly due to the increase in the company's marketing activities and the increase in market expenses. The net profit margin for the first quarter of 2024 was 21.1%, -3.6% YoY.

Profit forecast and investment advice: Stable growth has been maintained under a strong and high base since 2024, and the growth potential is expected to increase after the replacement of micro and refreshing products. At the same time, with its high brand potential, Qiangshuang played a role in boosting the company's channel expansion. It is expected that the pre-mixed cocktail business will grow steadily throughout the year. Considering that pre-prepared cocktails are a non-essential consumer product, and demand is growing slowly in the context of weak economic recovery, we lowered our profit forecast: the company's total revenue is expected to be 36.6/4.12 billion yuan (previous forecast value 40.0/4.74 billion yuan) to achieve net profit of 8.7/1.03 billion yuan (previously predicted value of 9.9/1.21 billion yuan) in 2024-2025. The current stock price is 24/20 times PE, respectively. The company's pre-blending business has an outstanding competitive advantage, and the forward-looking layout of the spirits business opens up room for long-term growth and maintains a “buy” rating.

Risk warning: Prices of raw materials have risen sharply, industry competition has intensified, the recovery in industry demand falls short of expectations, food safety issues, etc.