Incident: The company released its 2024 mid-year report. 1H24 achieved revenue of 1.33 billion yuan, an increase of 8.94% year on year; realized net profit of 0.198 billion yuan to mother, an increase of 12.1% year on year. In Q2 '24, revenue and net profit to mother were 0.498 and 0.039 billion yuan, respectively, with year-on-year changes of 3.64% and 38.9%.

Off-season adjustments and reforms continued, and overseas markets expanded at an accelerated pace. 1H24's liquor business achieved revenue of 1.31 billion yuan, up 10.2% year on year; Q2 liquor revenue increased 7.8% year on year in Q2. By product, high-grade wine/mid-grade wine/low-grade liquor achieved revenue of 0.3/0.15/0.04 billion yuan in Q2, respectively, with a year-on-year change of 1.0%/24.3%/8.5%. 1) New products are continuously adjusted and polished, and the company controls prices and digests the inventory of old merchants. 2) The relatively superior performance of medium- and low-grade wines is mainly driven by the relatively active price band of the public. Looking at the subregion, domestic revenue in Q2 fell 1.1% year on year in Q2, and revenue from outside the country increased by 31.1% year on year. In Q2, the company's brand operation center had a total of 139 dealers in Q2, an increase of 35 over the previous month.

The gross margin gradually increased, and the income tax rate decreased the profit margin. The company achieved a gross profit margin of 48.2% in Q2 in '24. The low level increased by 6.1 pct year-on-year, mainly due to a gradual decline on the cost side. The sales rate for Q2 in '24 was 17.9%, a significant increase of 5.0 pct. 1H24 sales expenses were +29.9% year over year, and the rate was +1.8 pct year over year. Among them, the sales rate for Q2 in '24 was +5pct to 17.9% year over year, mainly due to increased advertising expenses.

The income tax rate was -29.8 pct to 13.6% year on year, mainly due to the high base decline in the same period in 2023. The Q2 management rate in '24 (including R&D expenses) was -0.3pct to 3.55% year-on-year.

Investment advice: Company reforms continue to advance, and 1H24 is making layout adjustments in various directions such as product layout and channel model. We expect that with 2H24 and subsequent companies' new product promotion and nationwide investment promotion, the company's medium- to long-term development is worth looking forward to. The company is expected to achieve operating income of 2.62/3.08/3.52 billion yuan and net profit to mother of 0.4/0.47/0.55 billion yuan in 2024-2026, corresponding PE of 17.7/14.9/12.9 times, maintaining an “increase” rating.

Risk warning: Uncertainty about the positive pace of the economy; entry of overseas brands intensifies competition; cost control falls short of expectations; food safety risks.