2023&1Q24 results are in line with market expectations.

The company announced its 23-year results: 2023 revenue of 1,784 million yuan, +10.1% year over year; net profit to mother of 397 million yuan, +96.5% year over year; net profit after deducting non-net profit of 191 million yuan, +5.2% year over year, including 23 million yuan of non-recurring profit and loss, mainly revenue from disposal of long-term assets (the first phase demolition of Shen Yonghe Distillery). 1Q24 revenue was 567 million yuan, +10.7% YoY; net profit to mother was 62 million yuan, +5.3% YoY. The results for '23 and 1Q24 are in line with market expectations.

Development trends

The product structure upgrade and national market development are progressing smoothly in 2023. 1) By product: In 2023, high-end wine/regular wine achieved revenue of 12.42/482 million yuan, +12.4%/5.9% year over year, medium to high grade alcohol volume/price +7.2%/+4.9%, respectively, and regular alcohol volume/price +14.5%/-7.5%, respectively. In 2023, the company will focus on creating “only this green jade” core product, and expand waist products such as Tianchun series and original wine series. 2) Subregion: In 2023, Shanghai/Zhejiang/Jiangsu/other regions had revenue of 3.46/4.99/1.74/662 million yuan, +7.5%/9.4%/6.9%/14.7%. In 2023, the company added 263 new dealers to fill the gap in 24 prefecture-level cities in the north, and increase terminal sales outlets for mature market companies through “Famous Wine Entering Famous Enterprises” and “Four Seasons Storm” marketing activities.

In 2023, due to the optimization of the company's product structure, gross margin increased, and marketing investment increased, and the 1Q24 net profit margin remained basically the same. The gross margin in 2023 was +2.1ppt. We think it is related to product structure upgrades and production scale effects. Among them, the gross margin of medium and high-end wine/ordinary wine increased by 1.3/3.9ppt, respectively. In 2023, the company's sales rate was 13.8%, compared to +2.8ppt. Among them, the cost rate of advertising fees and e-commerce platform fees increased significantly. We expect this is related to the company's increased marketing promotion and the addition of e-commerce platform companies.

1Q24 gross margin was -0.1ppt year on year, sales expenses ratio +0.3ppt year on year, net margin -0.6ppt year on year. The profit situation was basically steady.

Outlook 2024: The company will continue its high-end, product structure optimization, and nationwide promotion strategy. We expect the company's revenue to continue to grow steadily with the increase in marketing of key products and the construction of terminal outlets. We expect that the optimization of the product structure will help improve the company's gross margin, but some of it will be offset by the conversion of the rice wine industrial park and increased depreciation, and the cost ratio side is expected to remain relatively stable. In addition, according to the company's announcement, Shen Yonghe Distillery's total compensation payments for the second phase of demolition are about 740 million yuan, and we have already received an advance of 350 million yuan in 2023. We expect some long-term asset disposal proceeds in 2024.

Profit forecasting and valuation

Considering that the product structure upgrade led to an improvement in gross margin, we raised our 2024 net profit 11% to 336 million yuan, and introduced a new net profit of 237 million yuan in 2025. The current stock price corresponds to 24.8/35.1 times the 2024/25 P/E. Maintaining a neutral rating, considering the profit forecast adjustments and the decline in sector valuations, we kept our target price unchanged at 10.4 yuan/share, corresponding to about 28.1/40.0 times the 2024/25 P/E, and there is about 13.9% upside compared to the current stock price.

risks

Demand is weak, market competition is intensifying, fixed asset investment is increasing, and food safety risks.