Incident: 2024H1 gross revenue of 0.994 billion yuan, -35.5% YoY; net profit to mother 0.121 billion yuan, -71.32% YoY; total revenue of 2024Q2 0.5 billion yuan, -13.27% YoY; net profit to mother 0.048 billion yuan, -60.87% YoY.

The decline in revenue has narrowed, and it is time for a firm transformation to proceed. 24H1's alcohol revenue was 0.99 billion yuan, or -35.6% year over year. By product, ① Naisen 24H1's revenue fell 60.8% year on year, volume and price ratio was -44.4%/-29.5%. It is estimated that Naisan Q2 revenue was around 0.15 billion yuan. Along with the lower base, the year-on-year decline narrowed in the single quarter. In '24, the company comprehensively and strictly controlled domestic shipments, suspended quotas for non-main products, and firmly focused on cultivating main products. The Jiachen edition implements small-batch delivery, reduces the dealer rebate ratio, and invests more money in C-side red envelopes/wine giveaways, etc., to drive a steady rise in batch prices for new products. ② Alcoholic 24H1 revenue fell 30.1% year on year, volume and price ratio was -29.3%/-1.1%. It is estimated that Q2 was about -20% year over year. The company clearly strengthened the model market and core terminal construction in '24. It is expected that the Red Hall and domestic dinner scenarios will perform well, inventory will be further reduced, and actual sales will outperform revenue performance. ③ The revenue of Xiangquan 24H1 was +36.3% year-on-year, taking on the demand of the public price band and achieving relatively rapid growth under a low base.

The downturn in the structure lowered gross profit, and upfront costs dragged down net profit. On the profit side, the net profit margin for 24Q2 was 11.6pct year-on-year to 9.5%, mainly due to a decline in gross margin and an increase in rates. ① The gross margin of 24H1/Q2 was -6.8pct/ -2.2pct, respectively, of which 24H1 gross margin was -2.8pct and -3.2pct, respectively. The main operating leverage contribution was negative. The tonnage price/ton cost was -29.5%/-7.9%, respectively, and the tonnage price/ton cost for alcoholics was -1.1%/+14.1%, respectively. ② The 24Q2 sales rate was +5.7pct to 35.5% year over year. 1 was that there was upfront investment in C-side expenses; 2, the revenue performance was not as good as marketing; the Q2 management rate (including R&D) was +1.6 pct to 9.7% year over year, and the main employee remuneration was relatively rigid (24H1 +0.007 billion yuan year over year, affecting about 1.5 pct). On the revenue side, the company's contract debt balance at the end of the Q2 quarter was 0.26 billion yuan, or -1.9/ +0.02 billion yuan year-on-month respectively. Confidence in the main channels has not been fully restored, and the willingness to repay is weak.

Profit prediction and investment rating: In the current environment, the company continues to firmly promote the transformation of the marketing model, focusing on the Shenzhen domestic market and building a model market. The next stage will also focus on breakthroughs and in-depth exploration to provide accurate services to key markets and key customers. As terminal construction and BC linkage results are gradually revealed, the revenue decline is expected to narrow further in the next quarter. We maintained net profit from 2024 to 2026 at 0.31, 0.35, and 0.43 billion, respectively, at -44%, +16%, and 21% year-on-year. The PE corresponding to the current market value is 37/32/26 times, maintaining the “increase” rating.

Risk warning: Uncertainty about the positive pace of the economy; food safety risks; adjustments by alcoholics outside the province fall short of expectations; competition for high-end wine exceeds expectations.