Incident: The company released its 2024 semi-annual report. 24H1 achieved operating income of 4.133 billion yuan, +17.5% year over year; realized net profit of 0.752 billion yuan, or -52.6% year over year; achieved adjusted net profit of 1.018 billion yuan, +26.9% year over year.

24H1 sales are progressing steadily, and adjustments continue to be made by various brands. We expect the incremental release of H2 to drive faster revenue growth over the previous month. 1) By brand performance, 24H1 Zhenjiu/ Li Du/ Xiangjiao/ Kaijiaojiao/ achieved revenue of 27.02/0.675/0.452/0.224 billion yuan respectively, +17.2%/+37.9%/+2.4%/+1.6%, respectively, accounting for 65.4%/16.3%/10.9%/5.4% of total revenue, respectively. Among them, Zhenjiu had a stable share as the largest brand. Driven by a dual-channel strategy, the sales performance of the core single product was good, and the increase in single dealer sales supported steady growth; Li Du 24H1's performance exceeded expectations, leading the growth rate of the single brand, and the revenue share increased 2.4 pcts to 16.3% year over year; the pace of Xiang Jiao was slightly smaller and the pace fluctuated greatly in the first half of the year. Under the relatively high base of 23H1, the 24H1 growth rate was lower than the group as a whole. 2) Looking at the split volume and price performance, 24H1 Zhenjiu/Li Du/Xiangjiao/Kaikiao sales volume was +7.9%/+30.2%/+2.5%/-11.9%, respectively, and the average sales price per ton was +8.6%/+5.9%/-0.1%/+15.3%, respectively. We believe that business progressed steadily in the first half of the year and had a good start during the Spring Festival. At the same time, small sales nodes such as Dragon Boat Festival continued to carry out actions to promote sales. Core products such as Zhen15 maintained steady growth, and the performance of Zhenjiu Premium Liquor Division exceeded expectations. Dongzhen Liquor achieved a sharp rise in volume and price; Li Du expanded its product matrix Sub-high-end and mid-tier extensions. With multi-brand product and channel adjustments in the second half of the year, incremental releases are expected to drive revenue growth to accelerate month-on-month.

The share of sub-high-end and above increased by 4.7 pcts to 67.1%, and the product structure continued to be optimized and upgraded. In terms of grade, 24H1 highest/sub-high-end products achieved revenue of 1.092/1.681/1.361 billion yuan respectively, +17.9%/+32.6%/+2.7%, respectively. The total proportion of sub-high-end and above products reached 67.1%, an increase of 4.7 pcts over the previous year. We believe that the company continues to optimize its product portfolio, create differentiated marketing methods in high-end products, and continuously launch the Zhenjiu high-end light bottle series and the real vintage series. Li Du 1308 and Xiangjiao Longjiang also have good reputation among high-end consumer groups; sales of sub-high-end main products are stable, with Zhen15 and Lidu Sorghum 1955 and 1975 driving significant revenue growth; at the same time, the company strategically diverted consumers of some mid-tier products to reduce some low-cost, low-profit products in the channel (direct sales 24H1 revenue 0.36 billion on/ same ratio- 15.5%), product architecture upgrades continue.

Structural improvement+self-harvesting of base wine drives an increase in gross margin, refined control of cost ratios, and gradual release of profit-side flexibility. 1) On the gross profit side, 24H1's overall gross margin reached 58.8%, up 0.9 pcts year over year. Among them, Zhenjiu/ Li Du/ Xiangjiao/ Kaijiao/ achieved gross profit margins of 59.2%/66.8%/58.8%/45.7%, respectively, +1.2/-2.0/ -1.4/+3.1 pct. We believe that the increase in the company's overall gross margin is mainly due to structural upgrades brought about by the increase in the share of high-end and above plus strategic reduction in sales of low-profit products in the middle and below+cost savings brought about by the gradual replacement of home-brewed base wine, the performance of the Zhenjiu Premium Liquor Division led to an increase in gross margin. The slight decline in Li Du's gross margin was mainly due to the expansion of the product matrix, which is in line with the strategic direction of future brand expansion. 2) On the rate side, the 24H1 company's sales and distribution expenses rate is 21.8% /year over year -1.2 pcts, and administrative expenses ratio is 6.6% /year over year -0.04 pcts. We believe that the slight decrease in sales expenses is due to increased labor efficiency of the sales team and improved marketing rate delivery efficiency. It is expected that the year-on-year reduction will be achieved without significant expansion of team personnel and refined cost management, and the rate side is still flexible. In summary, the adjusted equity incentive cost was about 0.266 billion yuan, and the company's adjusted net profit to mother was 1.018 billion yuan under 24H1 Non-Gaap. The year-on-year performance was outstanding, +26.9%. The adjusted net interest rate to mother was 24.6%, an increase of 1.8 pcts over the previous year.

High quality development potential continues, Zhenjiu's dual-channel strategy is growing clearly, and Li Du's vigorous development potential has exceeded expectations. We believe that the company's growth continues to be high quality, and the volume and quality of individual dealers continues to improve (+6.7% increase in number of dealers is lower than revenue growth +17.5%). Looking at the core brand, 1) Zhenjiu: The strategic goal of dual channel is clear. In the Spring Festival and Dragon Boat Festival sales season, the Zhenjiu Division clung to one tier of core market expansion outlets. Zhen15's single products grew in double digits, and the sell-by rate continued to rise. Zhen30 maintained double-digit growth in controlling the pace and channel switching adjustments. In late May, the new high-end product “Treasure Feast” for banquets was launched. Recently, Zhenjiu established the Zhen30 division. After independent operation, resources will be more focused, and the H2 increase is expected to be released at an accelerated pace. 2) Li Du: As a second brand with strong development, the three major single products of Lidu Sorghum have a good reputation. The main product line was upgraded in February, and the second-generation Lidu Sorghum was successfully launched in 1955 and 1975. With the expansion of the product matrix+regional layout, the development potential is worth looking forward to.

In summary, we believe that the company's goals have progressed steadily throughout the year. The first half of the year has shown steady operation, brand potential, and a clear strategy to adjust the product system, and judging from the pace of the whole year, 24H2 is expected to contribute more.

We believe that looking at the pace of the first half of the year, the second half of the year is expected to accelerate month-on-month. On the one hand, the company is expected to have greater growth in the second half of the year, such as the results of the Chen 30 channel adjustment in the first half of the year and Li Du's price band expansion attempt; on the other hand, the company has been active during the Mid-Autumn Festival National Day sales peak season since August, and continues to be guided by actual sales to promote channel repayment and sales, and steadily advance towards the goal of the whole year.

Profit forecast and investment advice: We believe that the company's clear positioning and strategic determination for the brand is long-term and firm, focusing on the pattern optimization space of leading soy wine brands, and strong multi-brand growth can be expected. We expect the company's 2024-2025 revenue to be 8.4/9.64 billion yuan, and the adjusted net profit under 2024-2025 Non-Gaap is 2.04/2.41 billion yuan, respectively, corresponding to the current PE 13/10X, respectively, to maintain the “Highly Recommended” rating.

Risk warning: Terminal inventories fall short of expectations; consumer consumption recovery falls short of expectations; industry competition intensifies; macroeconomic downside risks, etc.