Incident: The company released its 2024 semi-annual report. 2024H1 achieved total revenue of 0.667 billion yuan, or -13.16%; realized net profit of 0.011 billion yuan, turning a loss into a profit, or -0.038 billion yuan in the same period last year; and realized net profit of 0.004 billion yuan after deducting non-return to mother, turning a loss into a profit, which was -0.043 billion yuan for the same period last year. Looking at a single quarter, 24Q2 achieved total revenue of 0.247 billion yuan, or -26.25%; realized net profit to mother of 0.007 billion yuan, compared to 0.003 billion yuan in the same period last year; realized net profit after deduction of 0.011 billion yuan, compared to 0.075 million yuan in the same period last year.

Overall revenue declined year-on-year due to the cessation of the pharmaceutical sales business. Demand for Q2 liquor was weak during the off-season, and the promotion of chassis-based, fuhe incense continued. The company gradually divested pharmaceutical sales, resulting in a year-on-year decline in overall revenue. Looking only at the liquor portion, 24H1 achieved sales revenue of 0.552 billion yuan/YoY +11.8%, and 24Q2 achieved sales revenue of 0.183 billion yuan/YoY -15.1%. In terms of price and performance, 24H1 high/medium/low grade wine achieved revenue of 0.037/0.141/0.374 billion yuan, respectively, compared to +116.7%/+56.1%/-3.2%, respectively. Among them, the 24Q2 company's high/medium/low grade wine achieved revenue of 0.012/0.058/0.112 billion yuan respectively, +50.3%/-9.0%/-21.6%, respectively. We believe that the company's product side closely focuses on “strengthening the chassis and expanding Fuhexiang”. Fuhexiang 16/20 is in the cultivation period. Under the low base, the growth rate is relatively high. Overall demand for liquor consumption during the Q2 off-season was weak, regional competition strengthened, and the revenue growth rate of mid-range and low-end chassis products slowed down.

The province launched an offensive battle for TOP stores. The coverage rate of chassis product terminals reached 80%, and it gradually expanded outside the province. Looking at regional sales, 24H1 achieved revenue of 0.436/0.116 billion yuan in and outside the province, respectively, and +3.3%/+62.5% year-on-year respectively, while 24Q2 alone achieved revenue of 0.136/0.047 billion yuan within and outside the province, respectively, of -21.8%/+14.0% year-on-year. As of 24H1, the company had 317/204 distributors in and outside the province, a net increase of 21 or a net decrease of 5 compared to the end of 24Q1. With Fuyang as the center, the company focuses on core business operations such as TOP stores and chassis core stores to promote market construction and achieve 80% coverage of chassis product terminals.

24Q2 losses in a single quarter, rising advertising costs & employee salaries boosted sales expenses, and the market is still in the marketing period awaiting improvement in profitability. On the gross profit side, the company's 24H1 gross profit margin was 43.48%, +13.4 pcts year on year, of which 24Q2 gross profit margin was 41.70%, compared to +7.9 pcts year on year. Operating costs were reduced after pharmaceutical sales stopped. On the rate side, the 2024H1 company's cost rate for the period was 27.75%, +5.3pct year on year, and the sales/management/R&D/finance expense rates were 19.17%/7.3%/1.64%/-0.36%, respectively, +5.8/-1.3/+0.7/+0.2pcts; of these, the cost rate for the single 24Q2 period was 31.9%, +12.15pcts year on year, and the sales/management/R&D/finance expense rates were 22.6%/7.7%/1.76%/-0.16% year on year, respectively + 16.0/-4.5/+0.2/+0.5pcts. The increase in the sales expense ratio was mainly due to the fact that new products such as Fuhexiang were in the promotion period, and the scale effect was not yet apparent. The decrease in advertising expenses and employee remuneration was mainly due to a decrease in dismissal benefits during the reporting period. In summary, 2024H1's net profit margin was 1.66%, +6.59 pcts year on year, 24Q2 net profit margin -2.65% year on year, and -3.65 pcts year on year. It is expected that with the gradual release of scale effects in the later stages of product reform, profitability will recover and increase after structural improvements.

Focus on the development of the main liquor business and look forward to the long-term reform results of channel building+product adjustment+market attack.

We believe that the company is currently in a period of strategic reform and market launch, and the importance of the main liquor business after divestment from the pharmaceutical industry became prominent. In 24, it will continue to focus on the operation of the Fu7 Fu9 market. The chassis products will focus on soft and gold 6, improve the light bottle wine combination, and insist on the TOP store offensive battle with Fuhexiang as the core, the chassis large single product blasting battle, and the light bottle combination position battle. The potential for long-term reforms has yet to be unleashed.

Profit forecasting and investment suggestions: The company actively promotes organizational and personnel adjustments, channel reform, product reshaping, marketing innovation, etc., and is poised to improve profits and improve the path of operational recovery. We expect the company to achieve total revenue of 1.354/1.572 billion yuan in 24-25, and a net profit of 0.066/0.141 billion yuan to mother, maintaining a “recommended” rating.

Risk warning: New product cultivation falls short of expectations; macroeconomic decline; internal management adjustments fall short of expectations; increased market competition, etc.