Incident: The company released its 2024 mid-year report. In 2024H1, the company achieved total operating income of 0.994 billion yuan, or -35.50%; realized net profit due to mother 0.121 billion yuan, -71.32% year over year; realized net profit without return to mother 0.117 billion yuan, or -71.98% year over year. Looking at a single quarter, the company achieved total operating income of 0.5 billion yuan, -13.27%; realized net profit to mother of 0.048 billion yuan, -60.87% YoY; and realized net profit of 0.047 billion yuan after deduction of non-return to mother, or -59.86% YoY.

Focus on core products and accelerate model market construction. 1) By product, the 24H1 Alcoholics Series/Naisan Series/Xiangquan Series/Other Series achieved revenue of 5.91/0.173/0.049/0.177 billion yuan, compared to -30.11%/-60.85%/+36.33%/-17.51%, accounting for 59.48%/17.39%/4.94%/17.76%, respectively. For the alcoholic series, the company will improve the national market layout around Hongtan's big single products; for the Naisen series, the company will stick to the Jiachen version as the core gripper, optimize the value chain, and promote a profit-sharing operation model. Stimulate the vitality of existing customers, attract new customers, and accelerate the transition between old and new products. 2) By region, 24H1's total revenue in and outside the province was 0.413/0.581 billion yuan, respectively, or -33.68%/-36.74% compared with the same period last year. The company focused on the Hunan base market, Changzhu Tan and strong regions in western Xiangxi, and set up the Hunan Division to promote intensive channel cultivation and sinking. Outside the province, it mainly targets Hongtan as a model market, focusing on building a model market and concentrating resources to break through. Using the synergy between consumer code scanning activities and banquet activities as a starting point, Q2 terminal sales have improved. By the end of June, the company had launched 11 model markets and built core terminals around the model markets.

Optimize channel construction and promote healthy channel development. 24H1 online/offline revenue was 0.114/0.876 billion yuan, +1.79%/-38.53% YoY. The company will continue to optimize dealer customer quality, standardize dealer access management, strengthen dealers' back-office operation and management capabilities, and improve back-office service capabilities. Carry out phased marketing incentive activities to increase the enthusiasm of terminal portals to purchase goods. At the end of the 24H1 reporting period, there were 1301 dealers, a decrease of 473 compared to the end of 2023.

On the cost side, 24H1 company's sales/management/R&D/finance expense ratios were 22.38%/5.09%/0.75%/-3.87%, respectively, with year-on-year changes-

5.03/+0.25/+0.23/+0.92pct. Among them, 24Q2 sales/management/R&D/finance expenses rates were 35.48%/7.80%/1.88%/-2.31%, respectively, with year-on-year changes of +5.73/+0.96/+0.69/+1.92pct, respectively. The increase in each expense ratio is expected to be affected by the decline in denominator revenue. In order to promote marketing, strengthen consumer cultivation, and create a market atmosphere, the company invested sales expenses in advance, and the sales expenses rate increased in Q2. 24H1 gross profit margin 73.35%, year-on-year -6.80pct; net profit margin to mother 12.17%, year-on-year -15.20pct. Single 24Q2 gross profit margin was 75.59%, -2.22pct year on year; net profit margin to mother was 14.86%, -6.25pct year on year. The overall decline in gross margin is expected to be due to changes in product structure.

Firmly transform the marketing model and strengthen product and sales linkage. The company continues to optimize its marketing strategy. BC linkage has achieved certain results, terminal market activity continues to increase, banquet promotion and consumer code scanning activities have brought significant increases, and channel marketing has achieved positive results step by step. Continue to renew and disseminate the brand, promote the construction of self-media cultural columns, continuously improve the rich quality core and cultural connotation of alcoholic wine, continue to improve brand position, enhance market recognition, and continue to cultivate consumer mentality. Create a new model and new method for in-depth collaboration among manufacturers, thereby stimulating the core driving force of vendor linkage. Through continuous brand building and spreading brand value, it is expected that performance will rise steadily.

Profit forecasting and investment suggestions: Optimistic about the company's deepening cost reform, speeding up channel layout, and continuing to cultivate consumer groups, thus driving the rise of rich fragrance potential. We expect revenue of 2.413/2.796/3.374 billion yuan in 24-26, net profit of 0.48/0.554/0.636 billion yuan, PE of 24.31/21.05/18.34x respectively, maintaining the recommended rating.

Risk warning: Macroeconomic growth falls short of expectations; industry competition increases risks; food safety risks; risks where reforms fall short of expectations.