Incidents. The company released its 2023 annual report: in 2023, the company achieved total revenue of 1,469 million yuan, net profit to mother of -0.22 million yuan, and -187 million yuan in the same period of the previous year. Among them, the Q4 single quarter achieved total operating income of 396 million yuan, +6.8% year-on-year, net profit to mother of 13 million yuan, and -51 million yuan in the same period last year. The company released its 2024 quarterly report: 24Q1 achieved total operating revenue of 419 million yuan, -3.0% year-on-year, and net profit to mother of 0.18 million yuan, compared to -41 million yuan in the same period last year.

Increased volume drives revenue growth, and the channel network continues to expand. By product: In 23, the company's alcohol revenue was +43.5% (volume +79.6%, price -20.1%); of these, high-end wine achieved revenue of 0.53 billion yuan, accounting for +3.60pct of revenue, and -23.2% year-on-year revenue for mid-range alcohol. We think it may be related to product system adjustments. Low-end liquor revenue is +81.5% (volume +103.2%, price -10.7%). We think the main reason is that prices below 100 yuan have impressive product performance, and the number one seed in light bottles contributed to the increase. By region: In '23, alcohol revenue within the province/outside the province was +31.8%/+119.0%, respectively. Revenue from outside the province accounted for +7.05pct to 20.4% year-on-year, and the company's nationwide expansion continued. Channel division: Revenue from wholesale distribution/online direct sales channels was +42.5%/+73.0% year-on-year, respectively in '23. The company continued to explore the national market, with a net increase of 175/33 dealers in '23/24Q1. As of March 31, '24, the number of dealers in the province/outside the province was 296/209, respectively.

The company continues to deepen the channel layout in Anhui and surrounding regions, completing more than 70% of the channel layout around Anhui and more than 80% of the channel layout in key markets outside the province. In '24, the company will further optimize the channel structure, improve the chassis channel system, and accelerate the cultivation of high-quality dealers.

Gross margin increased dramatically, and contract liabilities increased month-on-month. The gross margin for '23/24Q1 was +13.88pct/+17.29pct to 40.3%/44.5%, respectively, and the gross margin for mid-range wine/low-end wine was +6.93pct/+15.00pct to 59.2%/43.3%, respectively. We believe or benefit from the good performance of products with prices below 100 yuan, and the product structure was further optimized. 24Q1 contract liabilities increased net month-on-month to $114 million.

Sales expenses were well controlled, turning a loss into a profit in 24Q1. The sales expense rates for '23 and 24Q1 were -4.60pct/-1.42pct, respectively, of which the '23 promotion/reward/advertising expense ratios were -3.29pct/-1.44pct/-2.15pct, respectively. The 23-year management expense ratio was -1.07pct to 8.9% year over year, mainly due to depreciation and amortization/other expenses ratio -0.64pct/-0.26pct year over year; of these, the employee remuneration rate was +0.45pct year over year, mainly due to the reform of the remuneration system and the increase in termination compensation. The company optimizes organizational efficiency, improves the performance appraisal system, and continues to make efforts to reduce costs and increase efficiency. 24Q1 achieved net profit of 0.18 million yuan to mother, turning a loss into a profit (-41 million yuan in the same period last year).

Profit forecasting and investment advice. We expect the company's revenue to be 18.13, 23.37, and 2,998 billion yuan respectively in 2024-2026, up 23.4%, 28.9%, and 28.3%; the potential of the Golden Seed Liquor reform will continue to be unleashed. We will give the company 5-6 times P/S in 2024, with a corresponding reasonable value range of 13.78-16.54 yuan (corresponding 57-68 times the P/E ratio in 2025), maintaining the “superior to the market” rating.

Risk warning. New product expansion falls short of expectations, industry competition intensifies, and food safety issues.