Key points of investment

Shanxi Fenjiu has unique competitive endowments: deep brand accumulation, differentiated flavors and a perfect product matrix, covering the entire low to medium to high price range, and a rich growth toolbox. The company's management has excellent management ability, employs a practical team with rich frontline experience and management capabilities. It is young and professional, and has different coping strategies in different consumption environments. The company chose a differentiated nationalization path, stabilized product upgrades in the market in Shanxi Province, and then gradually expanded from the Shanxi market to the central China, East China, and South China markets, and steadily implemented nationalization. The marketing model fully stimulates the enthusiasm of internal and external teams through national reform, and marketing methods are continuously strengthened to ensure the healthy development of the market. Recently, the new marketing team promoted Fenjiu's courtesy model, faced channel adjustments brought about by the industry environment, insisted on long-term development, and helped Fenjiu improve its performance in the medium to long term.

There are still structural opportunities in the liquor industry: 1) the competitive pattern of high-end brands with brands is still scattered, and national brands and strong regional brands have their own competitive advantages; Fenjiu's blue and white series brands have unique advantages in Fenjiu's brand power and fragrance differentiation; 2) Light bottles of wine are still expanding, enough to accommodate the birth of 10 billion major national products, and there is still room for growth as a major single product in the country.

The company's product strategy is continuously upgraded and improved, the product matrix layout is perfect, and different coping strategies are selected in different consumption environments. The company has a strong layout of large products at different levels, creating large single products such as blue and white 30/blue and white 20/Panama Laobaifen/Bofen at the high-end, mid-range/popular price bands, to promote the volume of Laobaifen/Panama (base market consolidation) & Bofen (light bottle star single product) during the economic growth slowdown phase, thereby ensuring performance growth; in the upward phase of the economy, it uses channel advantages to further enhance the blue and white series (blue and white 20 and 25 current volume & blue and white 30 follow-up relay). In the second quarter, the company took the initiative to stabilize the blue and white price insurance market. It is expected that the Mid-Autumn Festival and National Day will continue to gain strength. We are optimistic that blue and white will continue to grow steadily throughout the year. We expect Laobaifen & Panamanian waist products to be the main source of growth this year and next year.

Conservation within the province plus growth outside the province, there is strong room for future growth. 1) Provincial market: The Shanxi liquor market presents a competitive pattern of “one super many strong”. The leading position in the province is stable, and Fenjiu City accounts for nearly 50%. We believe that in the future, the base market in Shanxi will continue to be the core driver of the company's growth. Thanks to the upgrade of popular banquets from medium to low end boxed wine to old baifen wine, the middle and high-end banquet and business market will upgrade from Panama 20 to blue and white 25.

2) Markets outside the province: As the former “boss of Fen”, Fenjiu is relatively leading in brand promotion power and consumer mentality. Currently, it has a certain market share in Huanshan, East China, South China, Henan, Shandong and other regions. The annual report shows that the company's billion-level market continues to grow, and the market south of the Yangtze River has been growing by more than 30% for many years.

State-owned enterprise reforms stimulate internal organizational vitality and lay the foundation for the next stage of high-quality development. Since the implementation of Fenjiu's national reform in '17, the appointment of the company's personnel rights has become more market-based, fully stimulating the enthusiasm and coordination of the company's employees. Since then, the company has begun comprehensive in-depth reforms from organizational structure to product channels, laying a solid foundation for Fenjiu's one-of-a-kind revival path. The company successfully surpassed 10 billion in revenue in '19, and over 30 billion in '23. After taking office, Zhang Yongding continued to implement the Fenjiu Revitalization Program, modernize management, and proposed a revenue target of 50 billion by 2025.

Fenjiu benefits help Fenjiu speed, enhance channel momentum & digital empowerment. The company leverages the advantages of brand products and base markets, and continues to strengthen its marketing and channel strategies. Since October of last year, the “Fen Enjoy Rewards” model has been comprehensively promoted, that is, the new channel model and profit control model. Specifically, its effects include: 1) price control to guarantee a steady rise in the price market; 2) strengthen process assessment to improve cost efficiency; 3) strengthen terminal control, strengthen the digitization and fine control of channels on the basis of five codes in one, which is more conducive to maintaining a healthy price system and marketing expenses, and enhancing channel thrust.

Profit forecasting and valuation

Fenjiu has a differentiated nationalization path, that is, the brand matrix highlights core products, and marketing capabilities are continuously strengthened to drive the steady progress of nationalization. The company is currently in the harvesting stage during the nationwide expansion period, and is fully supported by fragrance potential. We are optimistic about the alternating relay growth of the blue and white series and waist products, the accelerated expansion of the market south of the Yangtze River, and the continuation of the fresh fragrance potential. We expect the company's revenue growth rate to be 18.38%, 15.25%, 15.49% from 2024 to 2026; the net profit growth rate to mother will be 20.40%, 16.60%, and 16.07%; EPS will be 10.30, 12.01, and 13.94 yuan respectively; PE in 24 will correspond to 14.4 times, maintaining the purchase rating.

Catalysts: Liquor demand recovery exceeded expectations; peak liquor performance exceeded expectations; blue and white series continued to increase; waist product performance exceeded expectations; smooth introduction of high-priced products.

Risk warning: Liquor consumption recovery falls short of expectations; sub-high-end performance falls short of expectations; batch price increases for core products fall short of expectations; progress in nationalization falls short of expectations.