Incidents:

On April 27, 2024, Yanghe Co., Ltd. released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 33.126 billion yuan, +10.04% year-on-year; realized net profit of 10.016 billion yuan, or +6.80% year-on-year. The first quarter of 2024 achieved operating income of 16.255 billion yuan, +8.03% year-on-year; realized net profit to mother of 6.055 billion yuan, +5.02% year-on-year. The company's EPS in 2023 is 6.65 yuan/share, and plans to pay 46.60 yuan (tax included) for every 10 shares.

Investment highlights:

Performance has grown steadily, and dividend rates have improved markedly. For the full year of 2023/2024Q1, the company's revenue was +10.04%/+8.03% year-on-year, and net profit to mother was +6.80%/+5.02% year-on-year, respectively. The company's performance maintained steady growth. In 2023, the company plans to pay a dividend of 7.020 billion yuan (tax included), increasing the share of net profit attributable to mother from 60% in 2022 to 70%. By product, in 2023, the company's high-end liquor/regular liquor achieved revenue of 285.39/3,950 billion yuan respectively, with a year-on-year difference of +8.82%/+20.70%. We expect Crystal Dream and Sky Blue to recover faster in 2023 with the consumption scenario. Haizhilan will maintain steady growth, and Dream 6+ will be affected by the price band where it is located. Looking at the subregion, the company achieved revenue of 143.93/18.096 billion yuan in 2023, respectively, +8.05%/+11.85% year-on-year, respectively. The growth rate of the market outside the province was higher than that of the province. We expect that the main market in the province is still undergoing adjustments. The Soviet and Chinese markets will be affected by the rise in competitive products, and markets that have performed well in recent years, such as Beijing, Shanghai, Jiangxi, and Hubei, will continue to grow rapidly.

The gross margin remained stable, and the cash flow performance was impressive. In 2023, the company's gross margin was +0.65pct year-on-year to 75.25%. This is due to the high volume of mid-range products sold in 2022, the high-end structure made up for in 2023, and the product structure upgrade. The net interest rate in 2023 fell slightly by 0.94 pct to 30.25% year on year. We expect mainly due to: 1) the company's increased market investment and digital investment, leading to a sales expense ratio of +2.38 pct to 16.26 pct%; 2) the tax and surcharge ratio +1.33pct to 15.91% year over year, mainly due to the increase in consumption tax.

2024Q1's net profit margin was -1.15 pct year on year, and the sales expense ratio was +1.11 pct year over year. It is expected that the company will increase its investment in marketing expenses during the Spring Festival. Furthermore, the company's cash flow performance was impressive. Net sales revenue/operating cash flow in 2023 was +12.84%/+68.06%, respectively, and 2024Q1 was +25.09%/+245.79%, respectively.

The current business environment is improving steadily, and the company's upward trend will not change in the future. We emphasized earlier that, on the one hand, the reason Yanghe has fallen into adjustment is due to industry reasons, that is, the company's mid-range products account for too high revenue, so in the process of upgrading the market to the next high-end, performance flexibility cannot be quickly released; on the other hand, it is a problem of its own management and organizational adjustments. After the new management was in place, the company basically completed sorting out the organizational structure, incentive system, channel model, and brand sequence. Currently, Dream 6+ is leading the scale in the 600 yuan high end price band; Crystal Dream's business has improved markedly from month to month. However, the stable price of products such as Sky Blue and Ocean Blue will still benefit from the upward upgrade of low-end products, and the company is also steadily promoting product structure upgrades. The two core issues plaguing the company have basically been solved. The company achieved steady growth in 2023. In 2024, the company strives to increase revenue by 5%-10% year-on-year, adhere to the development tone of “seeking progress through stability and promoting stability”, and firmly establish the development direction of “two famous wines, multiple brands, and multiple categories”.

The current consumption scenario is recovering steadily, and we believe that the company's long-term upward trend will not change in the future.

Profit forecast and investment rating: We believe that the company's brand and channels have basically been nationalized, that its core competitiveness remains unchanged, and that the industry-leading production capacity and storage capacity of high-quality base wine will be sufficient to support its future high-end and sub-high-end layout. The company attaches importance to employee motivation, promotes decentralization of functions, clearly evaluates rewards and penalties, fully releases management vitality, and continues to be optimistic about the company's future growth. We have adjusted the company's profit forecast. The estimated revenue for 2024-2026 will be 352.46/381.89/41,531 billion yuan, respectively, net profit to mother will be 10.6.95/116.10/12.629 billion yuan, and EPS will be 7.10/7.71/8.38 yuan, respectively. The corresponding PE will be 13/12/11 times, respectively, maintaining the “buy” rating.

Risk warning: 1) the pace of consumption recovery is being suppressed; 2) increased market competition has led to increased costs; 3) Liquor prices have declined due to drastic economic fluctuations; 4) the pace of product upgrades falls short of expectations; 5) food safety risks.