Empowered by Fosun's entry into old wine, the golden blossoms of Sichuan wine are blooming again

In December 2020, Fosun Group won 70% of the shares of Sichuan Tuopai Shede Group through Yuyuan Co., Ltd. and joined the company. After Fosun joined the company, it used its many resources to empower and actively cultivate the strength of the new generation while combining old and new senior personnel.

Product layout and quality firmly build a moat, and “be willing to go up, Tuopai down” two-wheel drive broadens the consumer base

The company is based on a “dual brand strategy”, with Shide and Tuopai as the core, while cultivating high-end and ultra-high-end products such as Tunzhihu, Tianzihu, and Unbearable. Savor Shide is based on core products at the next high-end price range, build the collection upward for ten years, and expand the price band layout in the downward direction. As a well-known brand in the 80s, Tuopai is committed to awakening the older generation of consumers while cultivating younger consumers, boosting the light-bottled wine circuit, and promoting the Twitter-level T68. It is expected to become the first light-flavored bottle of wine in the future. In 2022, the company established a joint venture to establish Yelang Ancient Winery Co., Ltd., to enter the popular soy sauce market and strive for the dual excellence of thick sauce. In the long run: 1) Sub-high-end: Benefiting from the expansion of middle- and high-income households, the increase in per capita disposable income driving consumption upgrading, changes in consumer categories, and the recovery of the banquet and business markets have driven the expansion of the overall sub-high-end sector. 2) Light bottled wine: The industry channel is mainly based on traditional forms and catering. The upward shift in the basic price band has driven the volume and price of light bottle products to rise sharply. Combined with stable consumer groups, channel structure growth, and priority in daily drinking and personal consumption, the “volume increase” logic brought about by a shift in demand for bottom-line boxed wine exists, which together drives stable expansion on the demand side of the demand side.

The prospects for the old wine market are improving. The “old wine+culture” strategy enjoys dividends on the demand side. The historical value of old wine is gradually being recognized by the market, and the old wine market pattern is beginning to emerge. On the supply side, Shede Liquor has a large stock of scarce old wine, excellent quality, and unique advantages. At the same time, they are willing to implement the “old wine+culture” strategy to lay out the old wine circuit: on the one hand, the company innovates the visualization and digitization of wine age to create the brand power of Shede Old Wine and promote the shift to banquet marketing; on the other hand, it keeps pace with the times, and the cultural strategy promotes multi-model terminal penetration.

The national layout forms a business layout, and the battle model breaks through the market

The provincial market is improving quality and volume, the quality of dealers is constantly being refined, the market continues to sink, and the agency model is flattened. By cultivating key cities, the company radiates districts and counties point by point and infiltrates northeastern Sichuan. The market outside the province is divided into 3 major markets and 38 key cities. The company adheres to the overall strategy of “focusing on Sichuan, Hebei, Lu Yu and Northeast China, breaking through East China and South China, and enhancing the Northwest China market” to advance the investment promotion process. Using the battle model, subjective activism was used to concentrate resources to break through the market. In 2022, the “Battle of Chongqing” and “Battle for the Capital” were carried out successively in key cities and provincial capitals across the country to expand the market step by step. Standardize channel management through the “3+6+4" strategy to strengthen the strategic position of old wine. Consolidate traditional superior channels, actively lay out new channels such as key customers, strengthen e-commerce channels, and improve omni-channel sales capabilities.

Investment suggestions: On September 26, 2024, the Political Bureau of the Central Committee held a meeting to bolster economic development, strengthen countercyclical adjustment of fiscal and monetary policies, and provide strong support for consumption recovery. With the recovery of future consumption and business scenarios, the price of sub-high-end liquor is expected to recover. Since this year, the company has adhered to the long-term principle, actively assisted dealers to promote sales and absorb inventory, and actively implemented the “price control and price increase” strategy. We believe that with the further layout and implementation of the old wine strategy, the advancement of the multi-brand strategy, the implementation of the “volume control and price stabilization” strategy, and the smooth implementation of phased adjustments, the Shede Liquor industry is expected to achieve healthier and long-term development. I am optimistic about the steady implementation of the company's development strategy, and look forward to the recovery of the future business scenario. The company has sufficient upward momentum. We expect the company to achieve operating income of 5.709/6.168/6.843 billion yuan in 2024-2026, a net profit of 0.959/1.102/1.225 billion yuan, EPS of 2.88/3.31/3.68 yuan/share, respectively. The current stock price corresponds to the 24-year PE of 26.65x, maintaining the recommended rating.

Risk warning: macroeconomic risks falling short of expectations; increased industry competition; food safety risks, etc.