Key investment points

Incident: The company released its 24Q3 financial report. The first three quarters achieved revenue of 27.52 billion yuan, a decrease of 9.1%; net profit to mother was 8.58 billion yuan, a decrease of 15.9%. Revenue for the third quarter was 4.64 billion yuan, down 44.8%; net profit to mother was 0.63 billion yuan, a decrease of 73.0%. Q3 revenue declined sharply year on year, mainly due to the slowdown in industry sales, and the progress of channel repayment and delivery slowed year over year.

Q3 Payment progress outside the province has slowed significantly, and in-depth report adjustments have released pressure. In 2024, the company's marketing strategy and channel control are still being sorted out and consolidated. The 24Q3 company's revenue was -44.8%/-9.1% year-on-quarter, respectively. The Q3 growth rate fluctuated greatly. 1 was the repayment pressure increased month-on-month; 2 was based on the 24H1 revenue recognition pace being higher year-on-year, and the Q3 confirmation pace was relatively normal.

Looking at the subregion, the decline in Q3 revenue is expected to expand, mainly due to poor repayment outside the province. As liquor sales continued to weaken, active channel removal efforts increased, brand selection became more concentrated, making it more difficult for companies to repay and ship in non-core markets outside the province, and the year-on-year difference in repayment progress outside the province widened markedly in Q3.

By product, since 24Q2, the company has moderately regulated the M6+ shipping pace to stabilize prices. Sea Blue continues to digest and rectify. The sales performance of Crystal Dream and Sky Blue is expected to be relatively better than the overall sales performance.

Negative scale effects dragged down net profit, and earnings from changes in fair value rebounded sharply. 1) Payout side: The contract debt balance at the end of the Q3 quarter was 4.97 billion yuan, -0.55 billion yuan year-over-year and +1.03 billion yuan, respectively. Advance payments improved slightly from a low level. 2) Profit side: Q3 net profit margin -14.4pct to 13.5% year over year. The gross profit margin and expense ratio deteriorated significantly, mainly due to negative scale effects. ① In Q3, gross margin decreased by 8.6pct to 66.2%, operating costs also decreased by 25.9%. Significant deterioration in gross margin was affected by operating leverage and trade off. ② Q3 sales expenses and management expenses (including R&D) were -1.1% and -12.6%, respectively, and the rates were +12.3 pct and +3.9 pct year-on-year, respectively. Sales expenses remained stable year on year due to continued promotion of atmosphere promotion activities such as banquet support and concert sponsorship; the year-on-year decline in management expenses is expected to be mainly due to a decrease in depreciation expenses and R&D material costs. ③ Fair value earnings in Q3 reached 0.19 billion yuan, an increase of 0.37 billion yuan over the previous year, contributing about 6 pcts to net interest rates, mainly due to a rebound in the market price of securities held by the company.

Deepen change, transform and leap forward. 2024 is a year for Yanghe to step inward and strengthen the rectification: ① On the product side, we need to focus on large products, improve manual classes, strengthen M6+, and implement basic models. ② The market side requires focusing on the base and highland market, and implementing project-based management, responsibility promotion, and checklist implementation by improving basic work, adding points and expanding coverage; iteratively improving the marketing organization structure within the province and improving dealer classification and classification management and dealer service measures. We expect the company to reshape well-trained and effective “dream building” teams through system optimization and organizational forging.

Profit forecast and investment rating: Since 23Q4, the company has taken the initiative to slow down and adjust, making it clear that prices of 600 and above are in the first place. It is expected that M6+ will go through controlled goods adjustments to lay a good 10 billion foundation, and that handmade products from the past year will revive the company's quality and brand image. Considering the current macro demand environment, we lowered net profit due to mother in 2024-26 to 8.1, 8.2, and 9 billion yuan (previous value 10.2, 10.7, 11.8 billion yuan), compared to -19%, +0%, and +10%. The current market value corresponding to 2024-2026 PE is 15, 15, and 14X, maintaining a “buy” rating.

Risk warning: competition within the province intensifies, development outside the province falls short of expectations, food safety issues.