Incidents. The company released its 2023 annual report and 2024 quarterly report: in 23, the company achieved total operating revenue of 2,830 billion yuan, or -30.1% year-on-year, and net profit of 548 million yuan, or -47.8% year-on-year. Among them, Q4 achieved total revenue of 687 million yuan in a single quarter, +21.7% year-on-year, and net profit to mother of 69 million yuan, or -10.1% year-on-year. The 1Q24 company achieved total revenue of 494 million yuan, or -48.8% year-on-year, and net profit to mother of 73 million yuan, or -75.6% year-on-year.

Operations are still under pressure, and transformation is underway. 1) In '23, the overall revenue of the company was in the adjustment stage. The revenue of its alcoholic, Naisen, and Xiangquan/ other series was -27.5%/-38.2%/-68.0%/-0.2%, respectively, to 16.47/7.15/0.71/388 million yuan. Among them, the volume/price ratio of the Alcoholics series was -17.6%/-11.9%. Among them, the number of times the Big Pinpin 18 opened and scanned the code increased by 70%, and the number of banquets increased by 40%. The volume-price ratio for the NES series was -32.7%/-8.2%. 2) In 1Q24, the company's revenue was -48.8% YoY to 494 million yuan, which fell short of expectations.

This is mainly due to factors such as the liquor industry in the adjustment stage, demand for sub-high-end liquor still needs to be recovered, and the pace of adjustment of the company's own products, channels, and marketing models. In the next step, the company plans to continuously improve performance by adhering to the BC joint marketing model, focusing on core customers in the Hunan base and model markets outside the province, optimizing the product value chain, and developing new businesses and channels. According to the quarterly report, the company's overall product sales, consumer bottling, and number of banquets all increased dramatically in the first quarter.

The decline in gross margin was compounded by an increase in sales expenses, and the company's profitability fluctuated greatly. 1) The company's gross margin in '23 was 1.29pct, of which Alcoholics, Insiders/Other Series were -2.46/ -1.50/+0.63pct, respectively.

The sales expense ratio was +6.94 pct. We believe it was mainly due to negative scale effects caused by a sharp drop in revenue. The absolute sales expenses in '23 fell 11.0% compared to '22. Management/R&D/finance expense ratios were +1.53/+0.17/ -2.28pct, respectively. In summary, the company's net interest rate to mother in '23 was 6.53pct year-on-year to 19.4%. 2) The gross margin of the 1Q24 company was -10.46pct year-on-year, and the period expense ratio was +7.93pct year-on-year. Among them, the sales/management/R&D/finance expense ratios were +7.90/+4.34/+0.30/ -4.61pct, respectively. As a result, the company's net profit margin for the first quarter was -16.26pct year-on-year to 14.86%.

There was a net decrease in contract liabilities, and operating cash flow was under pressure. The 1Q24 company's contract liabilities decreased net month-on-month by 50 million yuan to 235 million yuan, down from 367 million yuan in the same period in '23. After considering contractual liabilities, 1Q24's actual sales revenue was -50.6%; 1Q24's sales revenue was 318 million yuan, or -58.1% year-on-year, and net operating cash flow was -265 million yuan. We believe that procurement expenses, employee remuneration, and taxes were relatively rigid due to the year-on-year decline in sales repayments. As of the end of the first quarter of '24, the company had cash on book of 2,006 billion yuan.

Profit forecasting and investment advice. We expect the company's 2024-2026 EPS to be 1.90, 2.37, and 2.83 yuan/share, respectively. Referring to comparable company valuations, we gave the company 4.0-5.0 times PB in 2024, corresponding to a reasonable value range of 55.8-69.7 yuan, corresponding to 29.4-36.8 times PE in 2024, maintaining a “superior to market” rating.

Risk warning. Competition in the industry intensified, channel expansion fell short of expectations, and new product sales fell short of expectations.