Incident: Kweichow Moutai released its 2024 semi-annual report. 2024H1 achieved revenue of 83.451 billion yuan, +17.56% year over year, net profit to mother of 41.696 billion yuan, +15.88% year over year, net profit of 41.67 billion yuan excluding non-return to mother, and +15.92% year over year. 2024Q2 achieved revenue of 36.966 billion yuan, +16.95% year over year, net profit attributable to mother 17.63 billion yuan, +16.10% year over year, net profit after deducting non-attributable net profit of 17.619 billion yuan, +16.15% year over year.

In the second quarter, the wine series grew rapidly, and the price of Flying Sky rebounded steadily. By product, 2024H1 Maotai Liquor/ Series achieved revenue of 68.567/13.147 billion yuan, compared with +15.7%/+30.5%. Among them, 2024Q2 Maotai/ Series achieved revenue of 28.86/7.211 billion yuan, +12.9%/+42.5% YoY. Maotai Liquor benefited from skyrocketing price increases and the volume of non-standard products achieved steady growth. The high growth in the series was mainly due to continued sales volume in 1935, which slightly exceeded expectations. Q2 The company took the initiative to introduce price stabilization measures in response to market price fluctuations, such as adjusting the delivery pace of Maotai liquor, reducing the June payment ratio to about 6% (lower than 3% in the same period), suspending reservations and 1,499 yuan corporate group purchases on the Huluwa platform, stopping delivery of 12 bottles/boxes on the product side and suspending delivery of premium Maotai for 15 years, and suspending the synthetic exercise of Xunfeng 375m|. Maotai adopted the manufacturer's one-game chess strategy and price stabilization measures. As of August 8, 2024, Maotai's price rebounded steadily from the bottom to RMB 2,440. Series wines have increased significantly due to increased production capacity, and some series of wines have also contributed to price increases. The company announced a 1935 contract plan to suspend the sale of 1935 on July 2. The latest batch price was 780 yuan.

The share of direct management has declined, and i-Maotai's growth rate has slowed. 2024H1's direct sales/wholesale channels achieved revenue of 33.728/47.986 billion yuan respectively, +7.3%/+26.5% year over year, direct sales accounted for 41.3%, -4.0pct year on year, and 2024Q2 company's direct sales/wholesale channels achieved revenue of 14.409/21.662 billion yuan respectively, +5.8%/+27.4% year on year, direct sales accounted for 39.9%, -4.5 pct year on year, and the direct sales share decreased. 24H1 i Maotai achieved revenue of 10.25 billion yuan, +9.8% year over year, of which 24Q2 achieved revenue of 4.907 billion yuan, +10.6% year over year. Distribution channels are growing rapidly, mainly due to flying price increases combined with an increase in sales volume. The number of domestic and foreign dealers reached 2097/108 respectively, a net increase of 17/0 during the reporting period.

Contract liabilities increased month-on-month, and taxes and surcharges increased slightly. 2024H1's gross margin was 91.76%, or 0.04pct year on year, of which 2024Q2 gross profit margin was 90.68%, and -0.12pct year on year. The year-on-year decline in gross margin was mainly due to an increase in the share of wine series and distribution channels. The 2024H1 tax and additional/sales/management/R&D/finance expenses rates were 16.17%/3.14%/4.60%/0.11%/-1.07%, respectively. The increase in taxes and additional rates is expected to be mainly due to consumption tax impacts. It is expected that the tax rate will increase on the volume of wine series, but its levy on the production side may be mismatched with the sales process, and is expected to remain stable throughout the year. The net interest rate of 2024H1 reached 52.70%, -0.96pct year on year.

The company's net operating cash flow was 36.622 billion yuan, +20.52% year-on-year. The 2024Q2 contract debt was 9.993 billion yuan, +26.59/+0.47 billion yuan yoy/month-on-month, and the reservoir grew month-on-month.

Pay attention to shareholder returns and promise an increase in dividend certainty over the next 3 years. The total amount of cash dividends distributed by the company each year in 2024-2026 was not less than 75% of the net profit attributable to shareholders of listed companies in the current year. The annual cash dividend was implemented twice (annual and interim dividends), promising that the dividend rate would rise steadily for 3 consecutive years, slightly exceeding market expectations, and the dividend rate was above 3.66% according to current stock prices. The company has a positive outlook for 2024, aiming to achieve a 15% increase in total revenue and complete fixed asset investment of 6.179 billion yuan. In terms of Maotai liquor, Feitian increased its price by 20% on November 1, 2023, which may directly contribute about 5% of revenue growth. In addition, the sales volume of Maotai liquor is expected to reach 0.045 million tons in 2024, an increase of about 7% over the previous year. In terms of wine series, the prices of the two large single products, Classic Sauce-flavored Liquor and Golden Prince Liquor, were raised by 10 yuan and 20 yuan respectively. The new Han Sauce product is expected to contribute to the increase this year. The outlook for the 1935 target is positive, which will further boost the product structure of the series wine series. In the context of the gradual release of production capacity, the sharp rise in volume and price may continue, and the company's performance growth is sufficient.

Investment advice: Considering the price increase of Maotai liquor and the increase in production capacity of the series wine series, the profit forecast is adjusted according to the 2024 mid-year report and recent market sales conditions. EPS is expected to be 68.54/78.84/88.46 yuan, respectively, and the corresponding PE is 21x/18x/16x, respectively. According to the 2024 results, the target price is 1713.5 yuan, giving a “buy” rating.

Risk warning: Macroeconomic pressure, structural upgrades fall short of expectations, and industry competition exacerbate risks.