Incident: The company released its three-quarter report for 2024. The company achieved revenue of 4.362 billion yuan in the first three quarters of 2024, a year-on-year decrease of 1.89%; net profit to mother was 1.311 billion yuan, a decrease of 2.81% year-on-year. In Q3 2024, revenue and net profit to mother were 1.195 and 0.362 billion yuan respectively, a year-on-year decrease of 22% and 27.7%.

Also, the series continues to lay out, and the product structure is under pressure. By product, in 2024, Q3's high/medium/low-grade products achieved revenue of 1.139/0.013/0.021 billion yuan respectively, a year-on-year change of -22.7%/-55.3%/15.4%. Quarterly growth decelerated month-on-month. Mainly new and old products all concentrated on repayment in the first half of the year, and Q3 focused more on sales and digestion.

As of Q3 2024, the company's contract debt was 0.355 billion yuan, a year-on-year decrease of 7.5%. In Q3 2024, the company achieved sales revenue of 1.426 billion yuan, an increase of 1.8% over the previous year. Looking at the subregion, in Q3 of '24, revenue of 0.95/0.22 billion yuan was achieved respectively, a year-on-year decrease of 22.09%/25.59%. We expect that the province will mainly use vintage series products to drive double savings sales, and some regions and series of new products will provide a small increase. As of 2024, the number of the company's distributors in and outside the province was 500/508 respectively, with a month-on-quarter change of 1/10. Outside the province, investment promotion continued to be actively expanded, and the number of dealers continued to grow.

Gross margin is under pressure in the short term, and the cost ratio performance is relatively stable. In the third quarter of 2024, the company achieved a gross profit margin of 71.91%, a year-on-year decrease of 5.9pct. The main reasons are: 1) preferential policies for payment of old products declined, and costs improved along with volume; 2) the launch of new products boosted the product structure. In Q3 2024, the company's sales rate decreased by 3.03 pct year on year to 12.38%. The main reasons are: 1) the cost structure adjustment brought about by channel changes, and the share of C-side fee investment increased; 2) the investment in early consumption cultivation in new product stores increased. The Q3 management rate in 2024 increased by 1.03 pct to 7.52% year on year. We expect the company's talent team to expand due to the advancement of channel reforms; the sales tax rate increased 2.86 pct to 16.32% year on year, and the main reason is that the pace of tax payment is relatively ahead. Due to the decline in gross sales margin (YoY -2.88pct), the company's net profit margin fell 2.38pct year-on-year to 30.28% in Q3 2024.

Investment advice: Reforms are steady and far-reaching, and healthy channels are still awaiting repair. In Q3 2024, the company continued to focus on the “and series” layout. We believe that based on Anhui's liquor consumption potential and the company's product perception foundation, the “and series” replacement is steady and far-reaching. In the short term, the “Kane-8” launch has shown the results of reforms at the product and channel levels, but in the long run, along with the recovery of the industrial cycle, the company is expected to regain upward momentum. The company is expected to achieve operating income of 5.95/6.28/6.73 billion yuan and net profit to mother of 1.72/1.8/1.9 billion yuan in 2024-2026, corresponding PE of 14.0/13.3/12.6 times, maintaining a “gain” rating.

Risk warning: Competition within the province increases risks; consumption scenarios fall short of expectations; food safety risks; brand upgrades and channel reforms fall short of expectations.