Incident: The company released its 2024 three-quarter report. 24Q1-Q3 achieved revenue of 4.362 billion yuan, -1.89% year over year; realized net profit of 1.311 billion yuan, or -2.81% year over year; realized net profit deducted from non-mother of 1.266 billion yuan, -4.89% year over year. On a quarterly basis, 24Q3 achieved revenue of 1.195 billion yuan, or -22.04%; realized net profit to mother of 0.362 billion yuan, or -27.72% year-on-year; realized net profit after deduction of 0.337 billion yuan, or -32.34% year-on-year.

Competition in Huijiu intensified competition, and Q3 revenue was under pressure during the transition period for new products under weak recovery. We believe that the company's 24Q2 and 8 new products are well launched, and the product matrix complements the mainstream 200 yuan price band in the province. With the current weak recovery in the macro consumption environment and intensifying competitive environment in the province, the new product line is still in the market cultivation stage. Revenue in a single quarter is under pressure. In Q3, revenue was 1.195 billion yuan, or -22.04% over the same period last year.

1) In terms of grade, 24Q3 high/medium/low grade wine achieved revenue of 1.139/0.013/0.021 billion yuan respectively, which was -22.7%/-55.3%/+26.5% compared to the same period, respectively, and high-end wine accounted for 95.3% of total revenue.

2) Looking at the subregion, 24Q3 achieved revenue of 0.952/0.221 billion yuan within and outside Anhui Province, or -22.1%/-25.6% year-on-year.

3) By channel, 24Q3 direct sales (including group purchases) /wholesale agents achieved revenue of 0.043/1.129 billion yuan, respectively. The company continued to push forward channel flattening reforms within the province and accelerated the layout of channels such as group buying outside the province. As of 24Q3, there were 500/508 distributors within the province/outside the province, respectively, a net increase of 1/10 compared to the end of 24H1.

The decline in sales of middle and high-end products affected the level of gross margin. The sales expense ratio declined slightly year-on-year, and reservoirs shrunk. 1) Profit side: On the margin side, the company achieved a gross profit margin of 71.91% in 24Q3, -5.90pcts; on the rate side, the company's 24Q3 expense ratio was 19.83%, -1.77pcts year over year, with sales/management/R&D/finance expense ratios of 12.38%/7.08%/0.44%/-0.07%, respectively, with year-on-year changes of -3.03/1.27/-0.23pcts, respectively. We believe that the decline in sales of the company's middle- and high-end products limited the gross margin level. The sales expenses rate was high during the same period last year for the new series of stores, and there was a slight year-on-year decline in the current period. In summary, the 24Q3 company achieved a net profit margin of 30.28%, -2.38 pcts year over year. 2) Contract liabilities: As of the end of 24Q3, the company's contract debt was 0.355 billion yuan, a year-on-year decrease of 7.5%.

The marketing model reform is expected to gradually show results, and we will wait for the gradual release of new product potential. We believe that over the past 23 years, the company has continued to reform in various dimensions such as products, channels, and marketing. It has launched 24Q2 and 8 and held intensive press conferences, and has also set up actions such as manufacturer rebates and channel code scanning. Currently, the feedback on individual products is good under high channel pressure, and it is expected that the series price will be re-sorted out. The company continues to promote changes in the marketing model and build a platform-based sales system. New products are under pressure to grow due to the intensification of the competitive environment and weak recovery in demand. However, the determination to reform remains unchanged & the new product market continues to be carried out, and the results of the channel reform are expected to gradually show.

Profit forecast and investment advice: We expect the company to achieve total revenue of 58.19/64.30 yuan in 24-25, -2.4%/+10.5% year over year; we expect to achieve net profit of 1.711/1.911 billion yuan, -0.6%/+11.7% year-on-year, corresponding to the current PE of 12/11X, respectively, maintaining the “recommended” rating.

Risk warning: industry competition increases risks; new product promotion falls short of expectations; macroeconomic downside risks, etc.