Incident: Zhenjiu Li Du announced its 2024 interim results. The company achieved revenue of 4.133 billion yuan in the first half of '24, an increase of 17.5% year on year, net profit of 0.752 billion yuan, a year-on-year decrease of 52.6%, and adjusted net profit of 1.018 billion yuan, an increase of 26.9% year on year.

The volume and price of fine wine brands have risen sharply, and the trend of structural upgrading continues. The company's 24H1 revenue side continued to grow rapidly, which is also in line with our previous expectations. 1) By brand, the revenue of 24H1 Zhenjiu/Li Du/Xiangjiao/Haikouxiao was 27.02/0.675/0.452/0.224 billion yuan respectively, +17.2%/+37.9%/+2.4%/+1.6% compared with the same period last year. The sales volume/average price of the Zhenjiu brand 24H1 was +7.9%/+8.6%, respectively, showing a sharp rise in volume and price. The sub-high-end Zhen15, Zhen30, and high-end light bottle series contributed to major increases, and dealer quality and individual dealer sales also increased steadily. The increase in the volume of Li Du's brand was a major contribution, and Xiang Jiao and Laughter performed steadily. 2) In terms of price, the revenue of 24H1 highest/sub-high-end products and below was 1.092/1.681/1.361 billion yuan respectively, +17.9%/+32.6%/+2.7% year-on-year. The share of sub-high-end and high-end revenue reached 67.1%, +4.7 pct year on year, and the product structure continued to improve. 3) As of the end of the first half of '24, the total number of dealers was 7,360, a net increase of 99 compared to the end of '23. Among them, the number of experience stores decreased due to channel adjustments. It is estimated that 24H1 single dealer's revenue contributed 0.5127 million yuan/household, an increase of 14.3% over 23H1.

Increase gross margin and optimize investment efficiency to drive performance flexibility. 1) 24H1's comprehensive gross profit margin was 58.8%, +0.9pct year on year. Among them, the gross profit margin of the Zhenjiu brand was 59.2%, +1.2pct year on year. The steady increase in gross margin was due to the continuous increase in revenue contributions from sub-high-end and above products. At the same time, the company gradually replaced external procurement with home-brewed base wine, and the gross margin of the Li Du brand declined, mainly due to the company increasing its efforts at the sub-high-end price. 2) 24H1 sales and distribution expenses accounted for 21.8% of revenue, -1.2pct year on year. Mainly due to the increase in team efficiency and per capita income contribution after the company completed the expansion of the sales team, and the efficiency of marketing expenses investment was also optimized. Administrative expenses accounted for 6.65% of revenue, +0.9 pct year over year, mainly affected by the expansion of the R&D team, the increase in consulting service expenses, and the transformation of some Lidu Zhengjiashan projects. Excluding the impact of listing-related/equity incentive costs and fair value changes, 24H1 adjusted net profit of 1.018 billion yuan, up 26.9% year on year, and adjusted net interest rate of 24.6%, +1.8 pct year on year. 24H1 net cash flow from operating activities was 0.575 billion yuan, an increase of 166.2% year over year.

Profit forecast, valuation and rating: Maintain the 2024-26 adjusted net profit forecast of 2.02/2.52/3.03 billion yuan, corresponding P/E of 11/9/8 times. The company maintained its strategic strength. Zhen 30 basically completed the switch from group buying to distribution channels in the first half of the year. Recently, the Zhen 30 division was newly established, and more resources may be invested in the future. The Li Du brand is expected to contribute more incremental growth in the second half of the year. The Li Du brand broadens the product matrix and potential markets outside the province. Multiple brands can be expected to develop their potential and maintain a “buy” rating.

Risk warning: The recovery in business demand fell short of expectations, the actual pace of production expansion fell short of expectations, and competition in the soy sauce industry intensified.