The performance in 2020 exceeded our expectations

The company announced its 2020 results: revenue was 1.11 billion yuan, down 5.36% from the same period last year; net profit from home was 289 million yuan, up 73.60% from the same period last year; and net profit from non-return was 121 million yuan, down 4.60% from the same period last year. Of this total, 4Q20 income was 427 million yuan, an increase of 4.15% over the same period last year; the net profit was 225 million yuan, an increase of 164.96% over the same period last year, and the net profit exceeded our expectations, mainly due to the substantial increase in asset disposal income from part of the demolition funds received by the company.

Trend of development

As the epidemic is brought under control and the consumption scene gradually recovers, we expect sales to pick up in the future.

The company's sales of ordinary yellow rice wine in 2020 were 517,000 liters, an increase of 0.6% over the same period last year, and the impact of the epidemic has been gradually eliminated. Sales of medium and high-grade yellow rice wine were 484,000L, down 15.4% from the same period last year, which was greatly affected by the epidemic. We expect that with the epidemic under control, offline high-end beverage and business consumption scenarios will gradually recover, middle and high-end sales may gradually pick up, and the gross profit margin of medium-and high-grade yellow rice wine may reach 51.0%, or further increase the company's profits. we expect that there is some room for improvement in 2021. We expect sales of ordinary and medium-and high-grade yellow rice wine to increase by 6.00% to 5.48 million kiloliters compared with the same period last year.

We believe that the company should appropriately increase the sales expenses such as advertising and promotion in order to further expand the market, expand the revenue scale and optimize the channel construction. In 2020, the company's advertising and promotion expenses were 43.95 million yuan, a decrease of 19.65% compared with the same period last year, which led to a decrease of 15.62% in sales expenses and a decrease in sales expenses rate by 1.48ppt. At present, the overall consumption atmosphere of yellow rice wine is less than that of other liquors. we think that the company should increase market investment, increase accurate marketing online and offline to expand the audience and demand, broaden the consumption scene, talk about the yellow rice wine culture, and cultivate the consumption habits of yellow rice wine. and thicken channel profits, in order to obtain a larger market scale, and then expand the revenue scale. At the same time, on the premise of ensuring the share of Zhejiang Province, we will continue to actively expand the markets of Shanghai and other neighboring provinces and cities. We expect the sales expense rate to increase by 0.4ppt to 14.1% in 2021 compared to 2019.

We believe that the upgrading trend of the company's product structure will remain unchanged for a long time. With the trend of consumption upgrading, we expect that the future growth point of the company lies in the upgrading of product structure, and the increment of medium and high-grade yellow rice wine can be expected, but due to the lack of high-end single products of yellow rice wine, the space for structural upgrading may be limited.

Profit forecast and valuation

Due to the gradual recovery of the consumption scene, we slightly raised our 2021 profit forecast by 4.1% to 155 million yuan, while introducing a 2022 profit forecast of 149 million yuan.

The current share price corresponds to a price-to-earnings ratio of 30.1 times 2022 / 31.3 times 2022. To maintain the neutral rating, we raised the target price by 4.1% to 8.95 yuan, corresponding to 28.7 times 2021 price-to-earnings ratio and 29.8 times 2022 price-to-earnings ratio, which is 4.6% lower than the current stock price.

Risk.

If the impact of the epidemic persists, the recovery of mobile sales will be slower than expected; if revenue in Zhejiang, a niche market, declines, there will also be pressure on expansion outside the province.