Incident Overview

The company released an interim report. 24H1 achieved revenue of 0.67 billion yuan, or -13.2% year-on-year; net profit to mother was 0.01 billion yuan, reversing losses year-on-year (-0.04 billion yuan for the same period last year). 24Q2 achieved revenue of 0.25 billion yuan, or -26.3% year-on-year; net profit to mother was 6.547 million yuan, compared to 3.347 million yuan in the same period last year.

Analytical judgment:

The Fuhexiang series has made significant efforts to promote layout outside the province

24H1/24Q2 liquor revenue was 0.55/0.18 billion yuan, +11.9%/-14.9%, respectively; 24H1 high and low end wine achieved revenue of 0.04/0.14/0.37 billion yuan, respectively, +116.5%/+55.8%/-3.0%; 24Q2 high and low end liquor achieved revenue of 0.01/0.06/0.11 billion yuan, respectively, +49.8%/-9.3%/-21.2%. We believe that the foundation work for chassis products is relatively solid, and the Fuhexiang series showed significant strength in the first half of the year. The 24H1 province achieved revenue of 0.44/0.12 billion yuan respectively, +3.3%/+62.5%, respectively; in 24Q2, the province achieved revenue of 0.14/0.05 billion yuan, respectively, of -21.8%/+14.0%.

Based on data by product, we believe that in the first half of the year, the company used the Fuhexiang brand to actively lay out markets outside the province. At the same time, the year-on-year growth rate outside the province was obvious under a low base.

24H1/24Q2 pharmaceutical revenue was 0.11/0.06 billion yuan, or -58.2%/-46.5%, respectively. The pharmaceutical sales business ceased, and revenue declined markedly.

Gross margin continued to improve, and the increase in sales expenses dragged down 24Q2 performance 24H1/24Q2 gross margin of 43.5%/41.7%, respectively, +13.4/+7.9pct year-on-year, respectively. We believe that gross margin continued the 24Q1 improvement trend. At the same time, the year-on-year increase in high-end alcohol revenue in the first half of the year further drove the upward trend in gross margin. The 24H1 sales/management expenses ratio was 19.2%/7.3%, respectively, +5.8/-1.3 pct; 24Q2 sales/management expenses were 22.6%/7.7%, respectively, +15.9/-4.5 pct. The increase in sales expenses was mainly due to an increase in employee remuneration (+34.4% year over year) and advertising expenses (+35.0% year over year). The decrease in the management expense ratio is mainly due to a reduction in termination benefits. In summary, we believe that gross margin continued to improve in the first half of the year, but the increase in sales expenses dragged down 24Q2 performance, and 24H1/24Q2 net profit margins were 1.7%/-2.6%, respectively, +6.6/-3.6 pct.

Deepen organizational reforms and strengthen market attacks

We believe that in the first half of the year, the company continued the early practice of deepening organizational reforms and strengthening market attacks. According to the company announcement, organizational capabilities and management efficiency continued to be enhanced in the first half of the year. In the first half of the year, we achieved 80% chassis product terminal coverage through themed battles, clarifying model market construction goals, and focusing on core business actions such as TOP stores and chassis core stores; continuously promoted channel layout optimization to achieve a large-scale, nationwide layout based in Anhui; selected star customers internally, combined with China Resources, to select “Sanrun Club” major customers and focus on resource endowments.

Investment advice

According to the adjusted profit forecast in the interim report, the company's total revenue for 24-26 was reduced from 1.67/2.01/2.68 billion yuan to 1.3/1.27/1.44 billion yuan, net profit to mother was reduced from 0.1/0.28/0.48 billion yuan to 0.03/0.07/0.11 billion yuan; EPS was lowered from 0.15/0.43/0.72 yuan to 0.04/0.1/0.17 yuan; closing price on August 27, 2024 10.36 yuan corresponds to 242/105/62 times PE, respectively. Downgraded to “Overweight” rating.

Risk warning

The macroeconomic downturn affects consumer demand; food safety issues; demand falls short of expectations during peak seasons; competition within the industry intensifies; pharmaceutical transfers have not yet been completed, and there is uncertainty.