Key points of investment

Incident: 24Q1-3 achieved revenue of 27.516 billion yuan, -9.14% YoY, and net profit to mother of 8.579 billion yuan, or -15.92% YoY. 24Q3 achieved revenue of 4.641 billion yuan, or -44.82% YoY; net profit to mother 0.631 billion yuan, or -73.03% YoY.

We believe that the company is currently still in the adjustment period. Q3 actively controls the speed to adjust the pace to promote inventory removal. Currently, profitability, advance payments and cash flow are under phased pressure, waiting for demand to improve. Prior promises of absolute dividends were impressive, supporting high dividends without performance disruptions, and dividend ratios are cost-effective.

Active speed control to adjust the rhythm and optimize the product matrix

1) Volume: We expect the 24Q3 company to actively control speed, and the payment and shipping progress may be relatively slow.

2) Price: The price of Yanghe has declined since the beginning of the year, but large-scale promotions were not carried out during the Mid-Autumn Festival and National Day, so prices for major items such as Crystal Dream and Dream 6+ have remained stable recently.

3) By product: We expect Dream 6+ Control's price improvement performance to be stable in the first three quarters. Crystal Dream performed relatively well with the support of promotional policies. Sky Blue and Ocean Blue were relatively pressured by increased competition. Furthermore, this year, Yanghe launched a large-scale “Dream Blue Craft Class Global Tour” campaign to optimize the product matrix and reshape brand potential.

4) Market by market: We expect the province to be relatively pressured by increased competition. Offshore Blue of the province will benefit from the 100-300 yuan price expansion and upgrade performance is relatively excellent.

Profitability, advance receipts and cash flow are under phased pressure

1) 24Q1-3 gross margin/net margin -1.96/-2.59pct to 73.81%/31.17%; 24Q3 gross margin/net margin -8.63/-14.38pct yoy to 66.24%/13.52%.

2) 24Q1-3 sales/management (including R&D) cost ratio +2.41/-0.28pct to 14.17%/5.36% year over year; 24Q3 sales/management (including R&D) cost ratio was +12.27/+3.86pct to 27.75%/10.49% year over year.

3) Net operating cash flow of 24Q1-3 was -20.83% YoY to $3.458 billion. Net operating cash flow in 24Q3 was -65.31% YoY to 1.415 billion yuan.

4) 24Q3 contract debt -9.98% YoY to 4.966 billion yuan, +26.10% YoY.

Profit forecasting and valuation

Considering that sales of core products are still under pressure, and the reporting side's performance is weaker than that of sales under channel inventory, we adjusted our profit forecast. The company's revenue growth rate is -10.58%/1.38%/5.12%, respectively; the net profit growth rate to the mother is -16.53%/2.02%/5.72%; EPS is 5.55/5.66/5.99 yuan/share; and PE is 14.51/14.22/13.45 times. Considering that demand for liquor is expected to recover under policy catalysts, compounded by corporate governance or improvements, the company is highly elastic, and the company's dividend ratio is high, maintaining a buying rating.

Risk warning

Dream 6+ sales fell short of expectations; expansion outside the province fell short of expectations.