2023&1Q24 profit is in line with market expectations

The company announced 2023 results: 2023 revenue of RMB 1,411 million, +15.01% YoY; net profit to mother of RMB 167 million, +15.11% YoY. 1Q24 revenue was $437 million, +18.2% year on year, and net profit to mother was 92 million yuan, +16.1% year over year. 2023&1Q24 profit is in line with market expectations.

Development trends

The core markets of Jiangsu, Zhejiang and Shanghai grew rapidly in 2023. The trend of product structure upgrading continued, and 1Q24 continued this trend. 1) Subregion: In 2023, sales revenue from Zhejiang region/Jiangsu region/Shanghai region/other domestic regions was 8.60/1.36/2.60/1.09/0.09 billion yuan, +15.5%/27.8%/8.6%/1.9% year-on-year, with a total net increase of 230 dealers in the domestic market. With the goal of nationalization, the company launched four major campaign initiatives, including spring farming, summer ice, autumn harvest, and Dongwang, focusing on the middle and high-end consumer markets. 2) By product: In 2023, high-end wine/regular rice wine achieved revenue of 811/563 million yuan, +12.2%/16.7% year-on-year, +7.6%/+4.3% year-on-year, medium- and high-grade alcohol volume/price, respectively, and +4.3%/+11.9% of regular alcohol volume/price, respectively.

As the company focuses on promoting high-end products with “Lanting” as the core and vigorously developing the “Huijishan and Lanting” dual brand strategy, we expect the proportion of the company's high-end rice wine to increase further.

In 2023, product structure optimization, declining raw material costs led to an increase in gross margin, and increased marketing investment. 1Q24 continued this trend. Gross margin in 2023 was +4.1ppt year-on-year. We expect this is related to declining raw material costs (such as packaging materials, wheat, glutinous rice, etc.), product structure upgrades and production scale effects. Among them, the gross margin of medium and high-end wine/ordinary wine will increase by 5.0/2.3ppt, respectively. In 2023, the company's sales rate was 14.7%, compared with +3.2ppt. Among them, advertising expenses and employee remuneration related expenses increased significantly. The gross margin of 1Q24 was +4.9ppt year-on-year, and the sales expense ratio increased by 7.5ppt, continuing the changing trend of 2023.

2024 outlook: As the downward trend in raw material costs continues and the company's product structure continues to be optimized, we believe that the company's gross margin is expected to continue to be elastic. Furthermore, with the subsequent promotion of the “two wings in one” strategy of the company Huijishan and Lanting and the overall layout of the e-commerce circuit, we expect that the company's revenue structure will have room for further upgrading and develop new business growth support points.

Profit forecasting and valuation

We maintain our 2024 net profit of 181 million yuan, and newly introduced 2025 net profit of 199 million yuan. The current stock price corresponds to 29.1/26.6 times 2024/25 P/E. Maintaining a neutral rating, we have kept our target price of 11.8 yuan/share unchanged, corresponding to about 31.1/28.5 times the 2024/25 P/E, with about 7.2% upside compared to the current stock price.

risks

Weak demand, market competition risk, cost control risk, food safety risk.