Key points of investment
FY23/23Q4/24Q1 achieved revenue of 2,830/687/494 million yuan, or -30.14%/+21.72%/-48.80%; realized net profit to mother of 5.48/0.69/ 0.73 billion yuan, or -47.77%/-10.12%/-75.56% year-on-year.
Channel inventory removal is still ongoing, and short-term liquor sales are under pressure
The company's alcohol/other business revenue in '23 was -30.12%/-34.78% year-on-year to 2,821 billion yuan. Affected by the overall environment of the sub-high-end, the company's liquor products are still in the channel clean-up stage. By product, Naishan/Alcohol/Xiangquan/Other series achieved revenue of 715/16.47/ 0.71/388 million yuan respectively, compared to -38.21%/-27.45%/-68.03%/-0.15%, corresponding sales volume was -32.69%/-17.62%/-74.65%/-9.34%, with tonnage differences of -8.19%/-11.92%/+10.13%. The significant decline in domestic sales was mainly due to the impact of product control. The excellent performance of the relatively low price Red Dan/ Inner Product in the Alcoholics series led to a drop in tonnage prices. In '23, the number of people scanning the Red Tan 18 bottle increased by 70% and the number of banquets increased by 40%.
Facing the challenges of the external environment, the company's marketing core in the first quarter was to firmly promote the transformation of the marketing model, restore the price of main products, restore channel profit confidence, and focus on core single products, internal participation and red platforms. The 24Q1 company's revenue is still under pressure. We think the main reason is that the channel side is cautious about repayment intentions + the provincial Shenjiachen edition is still in the market introduction stage+ Xiangquan's sales volume is limited by production capacity.
Focus on the Hunan market and build a model market outside the province
1) Subregions: The Hunan Division was established within the province, display outlets were built and banquet activities were carried out. Alcoholics and domestic participants reached 95%/89% of the county-level market coverage in the province; 22 model markets continued to be promoted outside the province, making every effort to accelerate consumer development.
2) Channel division: The distribution/direct sales model achieved revenue of 2,798/32 billion yuan respectively in '23, or -30.50%/+29.48% year-on-year. The number of dealers in 23 was +188 to 1,774, with a net increase of 92/109/5/109/-127 in North China/East China/South China/Central China/Other regions. The company continues to expand dealer coverage, focusing on promoting core customer operation and terminal development in the first batch of 15 model markets. It has achieved 97% coverage of the national provincial market/ 73% coverage of the municipal market. In 2023, 1,381 dealers were signed, 393 specialty stores were signed, and the core terminal construction exceeded 30,000 (the 24Q2 plan is to add more than 6,000 high-quality terminals).
Profitability is under pressure in the short term, and cost reforms are still ongoing
1) Profit side: The company's FY23/24Q1 gross margin was 78.35%/71.08%, respectively, -1.29/ -10.46pct; the net profit margin was 19.36%/14.86%, respectively, -6.53/ -16.26pct.
2) Expense side: The company's FY23/24Q1 sales expenses ratio was 32.22%/33.93%, respectively, +6.94/+7.90pct; the management expenses ratio was 5.85%/7.97%, respectively, +1.53/ +4.34pct. Through cost reform, consumer marketing expenses accounted for +10% year-on-year, the number of effective core terminals +19% year-on-year, and +91%/+53%/41% year-on-year ratio for opening a code scanning/bottle lid exchange/number of dinners.
3) Advance payments: The 24Q1 contract debt of the company was 235 million yuan, a decrease of 50 million yuan over the previous month. 24Q1 sales revenue was -58.14% YoY to $318 million; net operating cash flow was -259.83% YoY to -265 million yuan.
Profit forecasting and valuation
After starting the strategic cost reform in '23, the company's various business activities have been carried out normally, and market expansion/brand promotion/channel concentration/capacity building have progressed steadily. We expect 24Q1 product sales to accelerate, and the sales side's performance will be better than the repayment side. It is expected that Naiseng/Alcoholic's operations will improve in the second quarter. In the future, the company will balance repayments and price markets, guarantee prices when promoting repayments, and balance short-term sales while adhering to long-term goals. We expect the company's revenue growth rate from 2024 to 2026 to be 3.54%, 6.45%, and 12.82%; net profit growth rates to mother will be -5.16%, 12.32%, and 20.95%, respectively; EPS will be 1.60, 1.80, and 2.17 yuan respectively; and PE will correspond to 31.95 times in 24, maintaining the purchase rating.
Catalysts: Liquor demand recovered beyond expectations; multiple reform dividends released; effective cultivation of a fuhe-flavored consumer atmosphere; sales of large single products accelerated during peak season.
Risk warning: Market expansion is blocked, and economic recovery falls short of expectations.