Incident: The company recently released its 2023 annual report and 2024 quarterly report. It achieved operating income of 2.83 billion yuan for the full year of '23, or -30.1% year-on-year; realized net profit of 548 million yuan, or -47.8% year-on-year. 24Q1 achieved operating income of 494 million yuan, or -48.8% year-on-year; realized net profit to mother of 73 million yuan, -75.6% year-on-year. The company pays a cash dividend of 10 yuan (tax included) to all shareholders for every 10 shares, with a dividend ratio of 59.3%.

Performance is still under pressure, and reforms are beginning to bear fruit. The 24Q1 company's performance is still under pressure. Subhigh-end consumer demand and channel confidence still need to be restored, but the company's fee reform is beginning to bear fruit. Consumer marketing expenses in 2023 increased by 10% compared to the previous year, the number of effective core terminals increased 19% year over year, the number of open bottles and code scans increased 91% year over year, the number of bottle caps changed increased 53% year over year, and the number of banquets increased by 41% year on year. Sales of Hongtan accelerated throughout 2023. The number of people opening and scanning the Hongtan 18 bottle increased by 70%, the number of banquets increased by 40%, and inventory is expected to drop accordingly. The company's Q1 control of Naisan has put pressure on performance. The essence of controlling goods is to stabilize prices, remove inventory, and at the same time promote the smooth listing of the new version of Naisan.

Expenses have risen, and profit levels are still below the same period last year. In '23, the company's gross margin was 78.4% (yoy-1.29pct), the sales expense ratio was 32.2% (yoy+6.94pct), the management expense ratio was 5.9% (yoy+1.53pct), and the net sales margin was 19.4% (yoy-6.53pct). In 24Q1, the company's gross margin was 71.1% (yoy-10.46pct), the sales/management expense ratios were +7.9pct/+4.3pct, respectively, and the net sales margin was 14.9% (yoy-16.3pct).

Expense transformation helps drive sales growth and is optimistic about future growth points. The decline in Q1 performance is due to participation in controlled goods within core products. We expect a rebound in Q2 performance. We expect subsequent companies to show long-term stable profits to dealers and boost channel confidence. We are optimistic about the company's future model market construction outside the province, and we look forward to a targeted breakthrough in the province's resources concentrated in the model market outside the province.

The cost transformation results of the company's core products, Alcoholics and Internal Revenue, are obvious. The launch of the new version is conducive to price raising; demand for domestic products is good, and it is expected to contribute to increased performance in the future. The dividend rate is still increasing under pressure from the company's performance growth rate, and future reporting improvements are expected to further increase the dividend rate.

According to the annual report and quarterly report, the revenue and gross profit margin were lowered for 24-26, and the expense ratio was raised. We forecast the company's earnings per share for 24-26 to be 1.65, 2.13, and 2.58 yuan respectively (the original forecast was 3.27 and 4.01 yuan for 24-25). Considering the company's sufficient cash flow, we used the FCFF valuation method, with an equity value of 201 billion yuan, corresponding to a target price of 61.80 yuan, maintaining a purchase rating.

Risk warning: Consumption upgrades fall short of expectations, internal sales fall short of expectations, risk of food safety incidents.