Key investment points

Incident: The company announced results for the first three quarters. From 24Q1 to Q3, it achieved revenue of 3.79 billion yuan, +5.6% year on year, net profit to mother of 1.13 billion yuan, +10% year on year, 24Q3 revenue 2.07 billion yuan, +0.4% year on year, and net profit to mother 0.88 billion yuan, +7.7% year on year.

Q3 made a smooth transition and a smooth start to the new fiscal year. 24Q3's alcohol business revenue was 2.04 billion yuan, +0.3% year over year, and volume price +4%/-4% year over year, respectively. 1) By product, 24Q3 premium/mid-range liquor achieved revenue of 1.94/0.1 billion yuan, respectively, -2.0%/+87.2%, respectively, and gross margin of +1.4pct/-1.8pct year-on-year. In 2024, the company continued to focus on large single products and moderately controlled deliveries to ensure that Q3 payments progressed smoothly on the basis of healthy channels. Among them, the Zhenjiang No. 8 banquet scene performed relatively well, and is expected to continue to grow steadily; demand from Jingtai, Collection, and above is under relative pressure, and sales are still yet to be verified; mid-range wine represented by Tianhao Chen has taken on a certain increase in popular consumer demand. 2) By channel, 24Q3 new channel/wholesale agent revenue was 0.12/1.92 billion yuan, respectively, -0.4%/+0.3% year-on-year, respectively. Traditional channels maintained steady growth.

Gross margin increased slightly, and sales cost investment optimization unleashed profit elasticity. The net profit margin for 24Q3 was 42.6%, compared with +2. 9pct compared to the previous year. The main reason was the optimization of sales expenses. 1) Gross profit margin: 24Q3 gross margin +0.86pct year-on-year. It is expected to be mainly due to the price increase of Fine Wine No. 8 and a slight increase in the gross margin of premium wine.

2) Expense rate: The 24Q3 sales expenses rate decreased significantly during the period of the main company to strengthen the refined management of marketing expenses and improve the cost efficiency ratio. The management expenses rate (including R&D) was +0.5 pct year over year, and the operating tax rate was -1.0 pct year over year. The main factors are expected to fluctuate between quarters. On the revenue side, 24Q3 sales revenue was -0.8% year-on-year, and the increase was weaker than revenue. The 24Q3 contract debt was 1.06 billion yuan, and -0.02/-0.07 billion yuan month-on-year, respectively. Under weak expectations, channel side repayments remained wait-and-see. Net cash flow from operating activities decreased by 20.42% year-on-year. The main reason was that after the Qionglai Industrial Production Base Project (Phase I) reached the expected usable state and was transferred to operation, cash outflow from related operating activities such as procurement of raw materials increased.

A new general manager has been selected, and the plan for the new fiscal year is stable and pragmatic. After more than a year, the company officially appointed Mr. Hu Tingzhou on July 15, 2024. Previously, Mr. Hu was responsible for sales management functions at Procter & Gamble, Kodak, and Pepsi, and also held key management positions such as Hershey China's general manager and president of Yuyuan Co., Ltd., and has extensive experience in the FMCG industry such as food and beverage. After the new general manager, Mr. Hu, took office, the new fiscal year planning was steady and pragmatic. We look forward to the continued improvement of the external environment to drive further improvements in the operation.

Profit forecast and investment rating: Based on the results of the first three quarters, we adjusted net profit of 1.32, 1.36, and 1.51 billion yuan (previous values were 1.13, 1.16, and 1.32 billion yuan), respectively, compared with 4%, 3%, and 11%, respectively. The current market value corresponds to the 2024-2026 PE of 21, 21, and 18 times, respectively, maintaining the “increase” rating.

Risk warning: The macroeconomic recovery fell short of expectations; the price competition among the subhigh-end players intensified; and the investment in brand building and consumer development expenses exceeded expectations.