Soy wine started the second half of the brand and regional concentration. The company's management is experienced, and ZJLD's three-level engine is working hard, and the future can be expected. We believe that the company's core strengths are:

1. The founder is experienced and has outstanding management advantages. Mr. Wu Xiangdong, the founder of the company, has thoroughly laid out the upstream and downstream liquor industry chains, and has been deeply involved in the liquor industry for more than 20 years. His rich industry experience has protected the company through adjustments and bucking the trend;

2. In terms of specialty wine, soy wine has entered the stage of branding development, focusing on the five major provinces to build a base market, and is expected to grow into a leading enterprise on the soy wine circuit; 3. On the Lidu side, Guobao Cellar Pool shapes high-end genes, creating a high-end light bottle benchmark, immersive experience marketing innovation channel model, and future nationalization space can be expected; 4. In terms of Xiangjiao & Laughter, the leading local consumption base and brand & channel advantages are outstanding. Hunan sauce wine heats up, and Xiang Jiao Lao Kai Lao Following the trend of soy sauce layout, it is expected that the leading regional advantage will continue to enhance the Hunan liquor market in the future Shares.

Zhenjiu: The flagship brand establishes the company's basic market and positions it as a nationalized sub-high-end soy wine brand. In 2023, Zhenjiu contributed 65% of the company's sales, which is the basic model of the company's performance. After acquiring Zhenjiu in 2009, the company continued to invest resources to expand production, reshape the product matrix, and rebuild the sales network. After a round of rapid growth since 2015, Zhenjiu has now transformed into a leading national soy wine brand that mainly sells subhigh-end and higher-priced products. In 2020-2023, Zhenjiu brand revenue increased from 1.346 billion yuan to 4.583 billion yuan, and the CAGR reached 50.46% as of 2023. Zhenjiu has grown to become the fourth largest soy wine brand in the country.

Li Du: High-end light bottle circuit and potential player in the fragrance category, creating the company's second growth pole. In 2023, Li Du contributed 16% of the company's sales and was the company's second growth engine. After being acquired by the company in 2008, it was positioned as a medium- and low-grade liquor in the Jiangxi region. After Tang Xiangyang took over the operation in 2014, Li Du completely reshaped Li Du in terms of products, brands, and channels, and successfully entered the high-end light bottle circuit with a differentiated approach to experiential marketing. In 2020-2023, Lidu brand revenue increased from 0.359 billion yuan to 1.11 billion yuan, and the CAGR reached 45.63%. Beginning in 2023, we will accelerate production expansion and further enrich the product matrix and improve the price band layout to help Li Du embark on a new journey of nationalization.

Xiangjiao: “One Tree, Three Fragrances” positions itself as a leading brand in the region, and deeply cultivates Hunan to benefit from the revitalization of Hunan wine. Xiangjiao contributed 17% of the company's sales, of which the Xiangjiao brand contributed 12% of sales, and the Kaikujiao brand contributed 5% of sales. It was acquired by the company in 2003 and has three flavor products. Its “Xiangjiao”, “Open Smile”, and “Shaoyang” brands cover the full price range of high and low. It is a leading company in Xiangjiao and has a solid consumption base in Hunan. In 2020-2023, the revenue of the Xiangjiao brand increased from 0.395 billion yuan to 0.834 billion yuan, and the CAGR reached 28.28%. The revenue scale of the Kaijiao brand increased from 0.172 billion yuan to 0.385 billion yuan, and the CAGR reached 30.77%.

Investment advice: It is estimated that in 2024-2026, the company will achieve operating income of 8.532, 10.228, 12.038 billion yuan, and net profit to mother of 1.897, 2.533, and 3.351 billion yuan, corresponding to PE (2024-10-14) of 12.9, 9.6, and 7.3X. We used the P/E method to value the company. Since Hong Kong stocks lacked comparable companies with liquor production and sales as the main business, we selected 15 A-share listed liquor companies with profits close to the company as comparable companies across markets. Referring to the 24-year PE average of 15 comparable companies, we gave the company a target PE valuation of 19.5X in 2024. The corresponding target market value was 37 billion yuan per share, and the target stock price was 10.93 yuan/share (HK$12.01 per share), giving the first coverage a “buy” rating.

Risk warning: 1. Nationalized expansion of fine wine falls short of expectations; 2. Competition in the soy wine industry intensifies; 3. The recovery in demand for liquor falls short of expectations; 4. Competition in the Hunan liquor market intensifies; 5. Nationalization of Li Du falls short of expectations; 6. Selecting comparable companies across markets may lead to high valuation conclusions, etc.