Incident Overview

The company announced its interim results. 24H1 achieved revenue of 4.13 billion yuan, +17.5% year-on-year; adjusted net profit of 1.02 billion yuan, or +26.9% year-on-year. Revenue was in line with market expectations, and profit slightly exceeded market expectations.

Analytical judgment:

The dual-channel strategy continues to advance, and the volume and price of Zhenjiu+Li Du have risen sharply

1) 24H1 Zhenjiu achieved revenue of 2.7 billion yuan, +17.2% year over year, sales volume +7.9% year over year, average price +8.6% year over year. Dealer and distribution channel quality optimization + sub-high-end (Zhen 15, Zhen 30 and high-end light bottle series) growth led to high double-digit revenue growth, while also achieving a sharp rise in volume and price.

2) 24H1 Li Du achieved revenue of 0.67 billion yuan, +37.9% year over year, sales volume +30.2% year over year, average price +5.9% year over year. Core products grew rapidly, while regional penetration outside Jiangxi Province led to high sales growth.

3) 24H1 Xiangjiao achieved revenue of 0.45 billion yuan, +2.4% year over year, sales volume +2.5% year over year, average price -0.2% year over year. Sales of the large single product Longjiang series increased, and overall revenue increased slightly.

4) 24H1 laughed and achieved revenue of 0.22 billion yuan, +1.6% year over year, sales volume -11.9% year over year, average price +15.2% year over year. The product portfolio was optimized, and revenue from high-priced products contributed to the overall price increase and decrease.

24H1 dealers/direct sales achieved revenue of 3.77/0.36 billion yuan respectively, +22.0%/-15.5%, respectively. Distribution partners/experience stores/retailers were +169/-119/49 compared to the end of '23, respectively. We believe that the growth of distribution channels is mainly due to the smooth progress of the dual-channel strategy. Traditional channels+group buying channels anchor the in-depth cultivation of core regions and core consumer groups, and cooperate with the good terminal management and control contributions of frontline business personnel. The decline in revenue from direct sales channels is mainly due to the reduction of low-priced, low-profit products sold through some online channels through product portfolio optimization.

The product portfolio optimization structure increased the gross profit margin, and the continuous cost optimization contribution performance exceeded the expected 24H1 gross profit margin of 58.8%, +0.9 pct year over year, and the gross margin of Zhenjiu/Li Du/Xiangjiao/Kaikou Xiao was +1.2/-2.0/ -1.4/+3.1 pct year-on-year, respectively. We believe that the main reason for the increase in gross margin is 1) the increase in revenue share of products above the lower end; 2) the strategic reduction of mid-range and lower products with lower gross margins; 3) the gradual replacement of cooperative production by third parties and the continuous optimization of packaging and other costs. Among them, the decline in gross margin of Li Du and Xiang Jiao mainly contributed more to the lower end income, which had a slight structural impact on gross margin, but Li Duzi's high-end and high-end revenue growth together contributed to a year-on-year increase in average prices. The 24H1 sales expense ratio was 21.8%, -1.2pct year on year. The main reason for the reduction in the cost rate was to optimize the efficiency of the team's per capita income generation and profit generation and improve the efficiency of marketing activities and cost investment. We believe that the company's sales expenses are expected to be invested more in offline experiential marketing and consumer development. The 24H1 management cost ratio was 6.6%, compared to -0.9 pct. Expenses for R&D, consulting services, and depreciation increased in the first half of the year, but the scale effect contributed to a decrease in the cost rate. 24H1's other income was $0.15 billion, +209.8% year over year, mainly due to increased interest income and government subsidies. 24H1 income tax +40.3% year-on-year was mainly due to continued high growth in operating profit, while some expenses in the first half of the year were not deductible before tax. Adjusted net profit of 1.02 billion yuan after deducting the effects of listing related expenses, equity incentive fees, and fair value changes, etc., was +26.9% year-on-year, and the adjusted net interest rate was 24.6%, or +1.8pct year-on-year.

The strategy is firm, and expectations are expected to be maintained throughout the year

We believe that the company's mid-report revenue performance is superior to that of other high-end enterprises, mainly because 1) the Chaoxiang Circuit still has a differentiated competitive advantage under the leadership of leaders after adjustment; 2) focusing on the core market development of Guizhou, Henan, Hunan, and Shandong markets (according to the wine industry), resource investment is more concentrated compared to the layout strategies of other sub-high-end enterprises with a national channel game; 3) Employee Empowering+Digital Sales Management can carefully grasp the actual situation of core market terminals and efficiently promote business development. Throughout the year, we have maintained our expectations of +20% revenue growth for the company as a whole, and we expect to maintain a high trend in the first half of the year.

Investment advice

The profit forecast remained unchanged, with revenue of 84/10/11.18 billion yuan for 24-26; net profit to mother of 20/24/29 billion yuan, EPS of 0.59/0.72/0.87 yuan.

The corresponding P/E for the closing price of HK$7.4 (HKD/RMB 0.9155) on August 21, 2024 was 8 times 11/9/8, respectively. The current 24-year PE valuation has been affected 11 times by sector pressure. We believe it is in a reasonable position to maintain a “buy” rating considering future company growth and the relative certainty of focusing on growth in the second half of the year.

The main reason for the year-on-year decline in net profit in '23 was affected by changes in the fair value of financial instruments issued to an investor. Excluding this impact, the adjusted net profit for 23 years was 1.62 billion yuan after excluding the impact and fees related to listing and equity incentives. The net profit to the mother was predicted to increase by 23.5% compared to the adjusted net profit in '23.

Risk warning

Weak economic recovery has led to weakening demand; management risks; increased risk of industry competition; risk of changes in the valuation center; food safety issues, etc.