Pearl River Brewery announced its 2024 semi-annual results. In the first half of 2024, it achieved total operating income of 2.986 billion yuan, +7.69% year over year; realized net profit of 0.5 billion yuan, +36.52% year over year; and realized net profit of 0.476 billion yuan without return to mother, +41.72% year over year. The second quarter achieved total operating income of 1.878 billion yuan, +8.07% year over year; realized net profit of 0.379 billion yuan, +35.63% year over year; realized net profit deducted from non-mother of 0.371 billion yuan, +40.61% year over year. The actual profit fell close to the median value in the performance forecast range.

The sales and revenue performance of the Pure Life series is outstanding, and the product structure is improving rapidly. In the first half of 2024, the company's beer business achieved revenue of 2.88 billion yuan, +8.24% over the same period last year. In terms of volume and price breakdown, the total sales volume of beer in the first half of the year was +1.4%, and sales performance was superior to the industry. Mainly due to the company's relatively high share of non-fresh drinking channels, which were relatively less affected by changes in current consumption habits and channel structure, and the company's Chunsheng series products continued to expand channels, contributing to revenue growth. Driven by the rapid growth of high-end products, the average price of beer was +6.7% year-on-year in the first half of the year, and the average price growth rate was at the leading level in the industry. The share of high-end product revenue in the first half of the year increased 5.4pct year-on-year to 71.0%.

Product structure has been upgraded, costs have declined, and profitability has improved markedly. The company's gross profit margin in the first half of the year was 49.0%, +3.6pct year-on-year, mainly due to the resonance effects of product structure upgrades compounded by declining costs. Since this year, prices of raw materials and packaging materials for winemaking such as barley, glass, and corrugated paper have declined, and the cost per ton of beer in the first half of the year was -0.5%. In terms of expenses, the sales expense ratio, management expense ratio, and R&D expense ratio all changed slightly. The financial expense ratio was +0.9 pct year-on-year, due to a decrease in the company's interest income. In the first half of the year, the company's net profit margin was 16.7%, +3.5pct year-on-year, and profitability increased significantly.

Investment advice: First coverage, giving a “better than the market” rating. Currently, 97 Chunsheng continues to accumulate brand potential in the province, and channel profits have an advantage. Combined with the company's continuous channel expansion efforts, 97 Chunsheng still has strong growth capacity. In addition, under the guidance of the product structure upgrade strategy, the company has further enriched its high-end product matrix to supplement the momentum for long-term development. I am optimistic that the company's high-end products will continue to grow rapidly, and the company's share in the Guangdong market is expected to continue to increase. We expect that in 2024-2026, the company will achieve total operating income of 5.733/6.057/6.388 billion yuan, +6.6%/+5.5% YoY, net profit of 0.8/0.9/1.02 billion yuan, +28.3%/+12.6%/+12.9% YoY. Earnings per share will reach 0.36/0.41/0.46 yuan, respectively. The current PE price is valued at 24/21/19 times. After multi-angle valuation, we expect the reasonable valuation of the company at this stage to be 9.26-10.12 yuan, with 7-17% premium space compared to the current stock price.

Risk warning: Consumption capacity continues to weaken due to increased downward pressure on the macroeconomy; increased competition in the industry has led to a passive increase in cost investment; prices of some raw materials have risen sharply; food safety incidents have led to a decline in industry sales and the risk of damage to beer brand image.