Key points of investment

Incident: The company predicted 24H1 revenue of 1 billion yuan and net profit of 1.1 to 0.13 billion yuan, a year-on-year decline of 35% and 69-74%, respectively. According to corresponding estimates, 24Q2 revenue and net profit to mother declined by 12% and 53-70% year-on-year, respectively.

Steady transformation, slow is fast. The 24Q2 company achieved revenue of 0.51 billion yuan. Compared with the 24th Spring Festival (estimated total revenue of 24Q1+23M12), Q2 off-season revenue remained stable. 1) The estimated Q2 revenue is 0.1 billion+. Along with the lower base, the year-on-year decline narrowed. In '24, the company comprehensively and strictly controlled domestic shipments, suspended quotas for non-main products, and firmly focused on cultivating main products. The Jiachen edition implemented small-batch delivery, reduced the dealer rebate ratio, invested more money in C-end red envelopes/free wine, etc., and promoted a steady rise in the wholesale price of new products. 2) It is estimated that the total revenue of alcoholics and others was less than 0.4 billion yuan, a single-digit year-on-year decline. In '24, the company clearly strengthened the model market and core terminal construction, driving a year-on-year increase in sales in the province. By the end of June, the company had launched 11 model markets. Through continuous consumer activities, terminal sales data such as number of banquets and number of consumer code scans were all greatly improved over the same period last year.

Investments continue to be invested in marketing, and upfront costs drag down profits. 24Q2 profit declined a lot, and the net interest rate fell by about 10-14pct year on year to 7.3-11.3%, mainly due to the year-on-year increase in sales expenses. In order to increase marketing, strengthen consumer cultivation, and guarantee channel profits, the 24Q2 fee amount is estimated to have increased by double digits over the same period last year, leading to a sharp increase in sales rates. 1 is that there is upfront investment in C-side expenses, and 2. However, in the context of active channel removal, revenue performance is not as good as marketing.

The regional layout is becoming more focused, and the model market is being further refined. In 2024, the company's movements became more stable, and the idea of building a regional market changed. Slow means fast. 1) The provincial market aims to resume growth in 2024:

The plan first focuses on in-depth implementation of the market in Changsha and more than a dozen county-level markets, and then pursues scale. Focusing on process quality, team assessments involve customer visits, terminal services, consumer bottle opening, etc., and strive to improve the quantity/quality/marketing/customer quality rate/customer satisfaction of outlets. 2) Markets outside the province create sample markets according to local conditions: 15 model markets, including Shijiazhuang, Quanzhou, and Handan, have been launched one after another. Each region earmarked special expenses for basic work (not linked to market sales refunds), focusing on strengthening channel profits and repayment enthusiasm through measures such as red envelope rebates and year-end rebates.

Profit prediction and investment rating: In the current environment, the company continues to firmly promote the transformation of the marketing model, focusing on the Shenzhen domestic market and building a model market. The next stage will also focus on breakthroughs and in-depth exploration to provide accurate services to key markets and key customers. As terminal construction and BC linkage results are gradually revealed, the revenue decline is expected to narrow further in the next quarter. We expect net profit from 2024 to 2026 to be 3.1, 0.35, and 0.43 billion, respectively, or -44%, +16%, and 21% year-on-year. The current market value corresponds to PE of 42/36/30 times. For the first time, it was covered, giving it an “gain” rating.

Risk warning: Uncertainty about the positive pace of the economy; food safety risks; adjustments by alcoholics outside the province fall short of expectations; competition for high-end wine exceeds expectations.