Key points of investment

Golden Seed Liquor is one of the famous wines produced by Anhui Real Estate. In 2022, China Resources took a share to completely reinvent the company in terms of brand, organization, and channels. Under the guidance of the “One and Two Wings” brand strategy, the company is firm in its strategy of “strengthening the chassis, improving quality and efficiency, expanding Fuhexiang, and innovating brilliance”. In 2024, it will adopt a “6+3+2” strategy, focusing on the six core products of Fufu 7/9+ No. 1 Seed/Tegong+Soft/Gold 6. In the short term, the company's chassis products are expected to continue to be sold against the backdrop of increased channel coverage and a strong trend of expansion in the 100 yuan price band; in the medium to long term, as the trend of consumption upgrades in the province continues, the Fuhexiang series and the number one seed single product are expected to bring new performance increases to the company and drive the return of the value of the Golden Seed brand.

China Resources has entered the market strongly, and organization+channel+brand has been comprehensively reshaped. 1) Organizational restructuring: The management team was restructured, and China Resources veterans with rich work experience were fully deployed to improve the organizational structure and optimize the process system. 2) Channel transformation: solve persistent historical problems and improve vendor relationships. The dealer team has been updated to guide efficient operation to improve efficiency, and terminal coverage and contracted dealers have increased dramatically. 3) Brand remodeling: establish a “one, two wings” brand strategy, cultivate the Fuhexiang series as the main product line for a long time; strengthen the chassis product base and activate the stock of old products; lay out a price band of 1,000 yuan to boost brand power. 4) Digital empowerment: Introduction of China Resources digital system to cover multiple aspects of production, operation and sales. Improve business operation efficiency internally, reduce costs and increase efficiency; improve channel control capabilities externally, and reduce problems such as trading and price chaos.

Chassis products: Reinvigorate and upgrade channels to build a basic platform to guarantee performance growth. The company's chassis products include old products such as Tegon, Xiang He, and Soft. It has a high brand awareness and loyal consumer base in the province. The company's liquor accounts for more than 70% of the company's overall revenue, building up the company's basic performance market. In 2021, the company renewed and raised prices for old products under 100 yuan, and also launched upgraded products to meet the demand for consumer upgrades and drive the product structure to improve. In terms of channels, in response to the problems of low terminal coverage and insufficient channel impetus, the company used marketing-themed actions such as the Spring Festival Campaign, Spring Farming Campaign, Mid-Autumn Festival Campaign, and the Spring Festival Campaign as a starting point to directly invest in terminal stores and consumers to drive marketing, and continuously deepen the channel layout in Anhui and the Anhui region. Currently, the completion rate of the channel layout in the Anhui region exceeds 70%, and the channel layout for key markets outside the province exceeds 80%. Thanks to the combined use of products and channels, the company's revenue side grew significantly. Relying on the increase in the number of outlets and the growth of single stores, low-end wine revenue increased by 81.51% in '23. By 2024, the “Soft” target will achieve 0.1 million terminal coverage, and the “Gold 6” target will achieve 0.06-0.08 million terminal coverage. The company will focus on building 0.012 million “Soft” and “Gold 6” core stores to seize market share and sales. We believe that the consumption upgrade in county-level cities continues, benefiting from the expansion of the 100-300 yuan price band. In the future, old products will still be the main driving force for the company's growth.

Fuhexiang: Focus on tobacco hotels+banquets+group purchases to cultivate brand value benchmarks in the medium to long term. The Fuhexiang series is positioned in the 200-700 yuan price range, including four major single products, Fu 7/Fu 9/Fu 16/Fu 20, which is an important layout for the company in the next high-end price range. Under the “one, two wings” strategy, the company vigorously cultivates Fuhexiang in terms of products, marketing, channel investment, etc. 1) Five-fold product upgrade: simple and easy to remember, quality improvement, packaging highlights brand tone, wider price band coverage, service empowers terminals. 2) In-depth multi-faceted marketing: Launch five major marketing actions to promote products and cultivate users. Online brand IP building, offline tasting sessions, three-level experience centers, factory tours, and the implementation of two projects one by one to attract opinion leaders and key people, and enhance brand influence.

3) Build a benchmark market in Fuyang, Hefei, and promote rapid channel expansion. The company focuses on the strategic highland of Hefei and Fuyang, the base market, and continues to expand channels such as TOP tobacco hotels, group buyers, banquets, and government and business group purchases through the 100 Group Thousand Enterprise Ten Thousand Stores Plan and the Wanfu Hexiang Tasting Conference. At present, the comprehensive channel layout for various markets in Anhui Province has been completed. Price control is excellent during the Spring Festival. This year, the goal is to complete in-depth cooperation with more than 0.01 million tobacco hotels. We believe that the Fuhexiang series is still in the brand promotion period as a high-end product, and in the short term, it still needs to rely on high market expenses to maintain and expand market share. After the official launch in June 23, it achieved sales revenue of 0.2 billion+, and 24Q1 contributed 0.1 billion+. Fu7 has become the company's second largest single product. The company plans to double its revenue in 24 years and continue to double in 25 years. Looking at the medium to long term, drawing on the growth path of the Yingjiao Dongzang series, we expect Fuhexiang to take about 5 years of cultivation cycle to build a banquet+smoke hotel+group purchase. Currently, the sales rate of outlets is 70-80% /terminal opening rate is 40%. After future product cultivation and maturity, it is expected to take on old products and contribute to revenue growth.

Number one seed: Positioning high-line light bottled wine, integrating beer and white to create a new engine for performance growth. The price of bottled wine in the province is moving upward, and there is a clear trend of younger consumers. No. 1 Seed is a new product in the seed wine series launched in 2023. It is positioned as a high-quality high-line light bottle wine and focuses on young consumers. China Resources has extensive experience in operating young products. In terms of marketing, No. 1 Seed and China Resources Beer products were jointly exposed to raise popularity; in terms of channels, China Resources achieved rapid network coverage through China Resources's extensive channel network throughout the province, and promoted terminal marketing by investing a large amount of money around terminals. There is a high degree of convergence between the operating methods of No. 1 Seed and beer. The company plans to create a synergy effect with China Resources to expand in the province and across the country, integrating beer and white to create a new engine for performance growth.

Differences between our views on the market:

Market concerns: The Huijiu market is fiercely competitive. The new product cultivation cycle is slow in the current environment. Golden Seeds have been left behind among the four golden flowers due to historical reasons, and there is concern that subsequent revenue is uncertain. The company lost money for many years in a row. Net profit from 21-23 was negative. Profitability was significantly lower than that of peers, and concerns about the company's profit performance.

We believe: We believe that the direction of the company's strategic reform is correct. Although short-term performance is suppressed by the overall consumption environment, if the company continues to build Fuhexiang to seize the banquet market according to the current plan, it is expected to regain market share and achieve a return to brand value in the medium to long term.

1) Revenue side: The company achieved sales revenue of 0.982 billion yuan for liquor in 2023, +43.46% year-on-year. Overall, it achieved high-quality growth, and the marginal improvement in performance was significant. We believe that in the context of the current environment, consumption downgrades and upgrades coexist, and the trend of expanding the 100 yuan price band is strong. The company's chassis products are just in this price band, with sufficient channel momentum and sufficient consumer mentality, which effectively supports short-term performance growth. It still takes some time to cultivate consumers of high-end products, mainly the Fuhexiang series. Despite short-term consumption downgrades under economic pressure, there is still a trend of medium- to long-term consumption upgrading, and the short-term slowdown in upgrading has given the company sufficient time to cultivate. Drawing on the cultivation cycle of the Dongzang series, it is estimated that it will take 5-6 years from new product cultivation to release. Medium- to long-term Fuhexiang products are expected to contribute significant revenue growth and become a value benchmark for the company's brand.

2) Profit side: Despite years of continuous losses in the company's history, profits were achieved in the first quarter of this year. On the one hand, thanks to the company's refined management such as lean production and lean procurement, the cost reduction and efficiency effects were obvious; on the other hand, the company implemented marketing initiatives such as the “Spring Festival Battle” to achieve good results, and made great progress in liquor revenue growth, cost efficiency. We believe that in the past, the gross margin of the public corporation was at a significantly lower level compared to its peers (the gross margin of Gujing Gongjiu/Yingjiangjiang/Jinzjiangjiao/Jinseengjiu Liquor was 81%/49%, respectively). In the future, as the product structure moves upwards and China Resources empowers cost reduction and efficiency, the company's gross margin is expected to increase, driving an increase in profitability.

Profit forecasting

China Resources's entry into the market enabled the company's development. Golden Seed carried out many important tasks such as organizational restructuring, brand remodeling, and channel reshaping during the critical year. Reform dividends continued to be released, and short-term business performance improved marginally. We expect the company's pharmaceutical industry to be divested from the reporting side in 2024-2026. We expect the company's revenue to be 1.581/1.396/1.594 billion yuan respectively, with revenue growth rates of 7.62%/-11.71%/14.13%, respectively. Net profit was 0.033/0.164/0.212 billion yuan, and EPS was 0.05/0.25/0.32 yuan/share, respectively, giving an “increase in holdings” rating.

Risk warning

Liquor sales recovery falls short of expectations; risk of intense competition in the sub-high-end industry; risk of consumer cultivation falling short of expectations.