Key points of investment:

Incident: The company announced its results for the first half of 2024. According to the company announcement, 2024H1 achieved operating income of 4.13 billion yuan, a year-on-year increase of 17.5%, profit attributable to equity shareholders of 0.75 billion, a year-on-year decrease of 52.6%, and adjusted net profit of 1.02 billion yuan, an increase of 26.9% over the previous year. The company's performance was in line with expectations.

Investment analysis: Maintaining profit forecasts, it is predicted that in 2024-2026, Zhenjiu will achieve non-GAAP net profit of 2/2.37/2.76 billion, respectively, up 24%/18%/16% year-on-year, respectively, and corresponding PE is 14/12/10x, respectively. As the only listed liquor company on the Hong Kong stock market, Zhenjiu focuses on the sub-high-end price range. In the medium to long term, the two major single products, Zhen15 and Zhen30, have the potential to be nationalized. As the company continues to consolidate its base market and upgrade and iterate its products, it is expected that it will continue its good growth potential and maintain its buying rating.

In the first half of the year, Zhenjiu+Li Du led growth, and the product structure improved. According to the company announcement, 2024H1 achieved operating revenue of 27/0.67/0.45/0.22 billion, respectively, with year-on-year growth of 17.2%/37.9%/2.4%/1.6%. In terms of price, the high-end, sub-high-end, mid-range and lower price bands achieved revenue of 1.09/1.68/1.36 billion, respectively, an increase of 17.9%/32.6%/2.7% over the previous year. The share of the sub-high-end price band and above reached 67%, an increase of 4.7 pct over the previous year.

Zhenjiu brand: The nationalization of Zhen15 is progressing in an orderly manner, and the expansion of the Zhen30 channel is showing initial results. According to the company's announcement, in terms of volume price, the 2024H1 brand achieved sales volume of 6,932 tons, a year-on-year increase of 8%, with a tonnage price of 0.3898 millions/ton, achieving a sharp rise in volume and price. The main reasons are: 1) Zhen15 sold well in the first half of the year, achieved rapid growth in key markets such as Henan and Hunan, and gradually recovered after experiencing channel adjustments in the Shandong market; 2) Zhen30 gradually switched from the original group buying channel to distribution channels in the first half of the year.

Li Du brand: gradually starting the path of nationalization with the three light bottles of wine as the core. According to the company's announcement, in terms of volume price, the 2024H1 Lidu brand achieved sales volume of 1,371 tons, a year-on-year increase of 30%, and a tonnage price of 0.492 million yuan/ton, an increase of 5.9% over the previous year. Currently, Lidu is building a Lidu main brand+Li Duwang series wine product matrix around the three core brands of Lidu Sorghum 1308, 1955, and 1975. In terms of style of play, the provincial market continues to deepen group buying channels with the core three high-line light bottles, and uses Li Duwang to expand distribution channels; in markets outside the province, focus on the three major brands to establish brand awareness and gain a core customer base.

Product structure optimization drives increased profitability. According to the company announcement, 2024H1 achieved a gross profit margin of 58.8%, an increase of 0.9 pct over the previous year. By brand, Zhenjiu/ Li Du/ Xiangjiao/ Kaijiao/ achieved gross profit margins of 59%/66.8%/58.8%/45.7%, respectively, +1/-2/-1/+3pct. The increase in gross margin was mainly due to an increase in the share of the company's subhigh-end and higher price products, and the replacement of base wine produced by a third party with lower-cost homegrown base wine after the expansion of production capacity. 24H1's sales/management expense ratios were 21.85%/6.65%, respectively, -1.15/-0.04pct, respectively. Cost optimization was mainly due to the company continuously optimizing the efficiency of the sales team and achieving an increase in per capita output. After excluding the impact of factors such as listing fees and changes in the fair value of financial instruments, the company adjusted its net interest rate of 24.6%, an increase of 1.8 pct over the previous year.

Risk warning: Food safety issues, demand for liquor falls short of expectations due to economic downturn, and industry competition intensifies.