Key points of investment:

Incident: The company released its 2024 mid-year report. According to the company announcement, 2024H1 achieved operating income of 20.068 billion yuan, down 7% year on year; net profit to mother was 3.642 billion, up 6.3% year on year, after deducting net profit of 3.427 billion yuan year on year, up 6.15% year on year. Among them, 24Q2 achieved operating income of 9.918 billion yuan, a year-on-year decrease of 8.9%, net profit to mother of 2.044 billion, an increase of 3.55%, and net profit after deducting non-return to mother of 1.914 billion yuan, an increase of 1.87% year-on-year. The company's revenue and profit are in line with expectations.

Investment rating and valuation: Due to weak external demand, the profit forecast was lowered to predict that the company will achieve net profit of 4.8/5.25/5.68 billion (5/5.63/6.22 billion previously) from 2024 to 2026. The current stock price corresponds to the 24-26 PE of 16x/15x/14x, respectively, maintaining the purchase rating. The company's valuation has been lowered to a relatively low level in the past 10 years. The A-share valuation is reasonable, and the Hong Kong stock valuation is clearly discounted and more cost-effective. Along with future capital expenditure decreases, the dividend rate has the potential to continue to increase. The dividend rate corresponding to the 2023 dividend rate is 3.5%, which is quite attractive. In the medium to long term, the company continues to optimize its product structure, and the price of tonnes of wine has risen smoothly. Along with the improvement of cost pressure, profit flexibility will be further unleashed. As one of the local enterprises with the most brand power and high-end genes, the company is continuously optimizing its capacity utilization rate and operating efficiency, and continues to be optimistic about the room for improving the company's medium- to long-term profitability.

Sales declined year over year due to pressure from external demand. According to the company announcement, in 2024H1/Q2, the company achieved sales volume of 4.63/2.446 million tons, -7.8%/-8% year-on-year, respectively. Due to the effects of rainy weather, combined consumption scenarios such as restaurants and nighttime events are under pressure, and sales have declined. Looking at the structure, 24H1/Q2 company achieved sales of 1.896/0.936 million tons of high-end beer, respectively, or -4%/-5.55% year-on-year, respectively. 24H1/24Q2 companies achieved tonnage prices of 4334.4/4054.9 yuan/ton respectively, +0.83%/-0.91% year-on-year, respectively. The decline in Q2 tonnage prices was mainly due to a decline in the share of beer sales due to middle and high-end prices. Since this year, judging from the demand structure, the high-end price band (8 to 10 yuan and above) has faced certain consumption downgrade pressure, and the mainstream price band (6 to 8 yuan) has performed relatively well. Looking ahead to the second half of the year, with reference to data from the National Bureau of Statistics, beer production above the national scale fell 10% year on year in July 2024, reflecting that the demand side has not recovered. We believe that in the context of a weak peak season, there is some pressure on sales throughout the year. However, in the medium to long term, beer still has the potential to upgrade its structure.

The decline in raw material costs improves tonnage cost performance and optimizes sales expense rates. 2024H1/Q2 company tonnage costs were 2531/2319.7 yuan/ton, respectively, -3.14%/-5.4% year-on-year, respectively. The accelerated decline in Q2 ton costs was mainly due to a marked drop in the prices of raw materials such as barley this year, and the use of some high-priced barley stocks in Q1. 24Q2 achieved a gross profit margin of 42.8%, an increase of 2.7 pct over the previous year. On the cost side, the company's sales/management expenses ratio was 8.75%/3.25%, respectively, up 0.43/0.17pct year-on-year. The 24Q2 company's other revenue was 0.19 billion, an increase of 0.1 billion over the previous year, mainly due to an increase in government subsidies received. Thanks to the increase in gross margin brought about by lower costs, 24Q2 achieved a net interest rate of 20.6% to mother, an increase of 2.5 pct over the previous year.

The catalyst for stock price performance: product price increases.

Core hypothetical risk: Competition in the middle and high-end intensifies, and raw material costs rise above expectations.