Key investment points:

Sales growth declined above a high base. In the first three quarters of 2024, the company achieved revenue of 2.386 billion yuan, a year-on-year increase of -2.88%, down from 49.35% in the same period last year. Among them, revenue for the third quarter was 0.758 billion yuan, up -5.95% year on year, with negative growth for two consecutive quarters. Referring to operating cash flow, the company's sales cycle did fluctuate greatly: in the first three quarters, sales received 2.484 billion yuan in cash, a year-on-year decrease of 10.4%, and the cash flow was in line with the direction of change in revenue.

Due to the fact that the cost of pre-mixed wine has dropped a lot, gross margin has increased in the current period. In the first three quarters of 2024, the company's gross margin increased by 3.25 percentage points to 70.11%. In the first and second quarters of 2024, the operating cost of pre-mixed wine decreased by 13.07% year-on-year, down 14.49 percentage points from revenue.

Costs fell faster and more than revenue, which is the main reason for the general rise in gross margin in the current period.

Sales expenses have increased, leading to a decline in profit levels. In the first three quarters of 2024, the company's sales expenses increased 27.48% year on year, and the sales expenses ratio increased 3.94 percentage points year on year. The net interest rate for the current period fell 3.06 percentage points to 23.95% due to rising sales expenses and management and financial expense ratios. The increase in the sales expense ratio is mainly reflected in advertising expenses and depreciation amortization: in the first two quarters, advertising expenses increased 93.35% year over year, and depreciation and amortization increased 38.45% year over year.

Investment advice: We forecast the company's earnings per share for 2024, 2025, and 2026 to be 0.76, 0.80, and 0.86, respectively. Referring to the closing price of 27.8 yuan on December 11, the corresponding price-earnings ratios were 36.71, 34.76, and 32.2 times, respectively, and downgraded the company's rating to “prudent increase in holdings.”

Risk warning: In a situation where consumer consumption is weak and downstream restaurants, nightclubs and other establishments operate in a slump, sales growth of pre-mixed wine will continue to slow down or turn negative.