Incidents:

On October 30, 2024, Luzhou Laojiao released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 24.304 billion yuan, +10.76% year-on-year; net profit to mother of 11.593 billion yuan, +9.72% year-on-year; net profit after deducting non-attributable net profit of 11.564 billion yuan, +10.24% year over year. In 2024Q3, the company achieved operating income of 7.399 billion yuan, +0.67% year over year; net profit to mother of 3.566 billion yuan, +2.58% year over year; net profit after deducting non-attributable net profit of 3.57 billion yuan, +3.52% year over year.

Investment highlights:

Q3 Control goods and raise prices, and steadily advance channel expansion. 2024Q3's revenue growth rate declined month-on-month (2024Q2 revenue increased 10.51% year over year). We believe it is mainly due to the current weak recovery in macro demand, and the company may actively control delivery pace and channel inventory to maintain price stability.

The company focuses on “high market penetration, high network coverage, and high consumer opening” to promote marketing work during the Mid-Autumn Festival and National Day peak seasons, implement channel drilling plans, expand marketing outlets, optimize channel profit distribution methods, and increase the number of strategic terminals. Do a good job of basic work on the basis that the consumer environment is under pressure, and save energy for long-term development.

Gross margin declined slightly, and cost control was steady. 2024Q3's gross margin fell slightly by 0.53 pct to 88.12% year on year. We believe that it is mainly due to changes in the internal structure of the category, and the share of mid-range alcohol may have increased. The 2024Q3 sales/management/ finance expense ratios were 11.76%/3.54%/-1.59%, respectively, -1.07/-0.58/+0.09pct, respectively. Overall, the cost-side control was good, and the net profit margin for 2024Q3 was +0.9 pct to 48.19% year over year. On the revenue side, 2024Q3 sales revenue was 8.107 billion yuan, -19.42% year over year; end-of-period contract debt was 2.654 billion yuan, -3.08/+0.312 billion yuan, year-over-year, respectively.

Adhere to healthy development and improve long-term management. Demand in business and banquet scenarios has been weak since 2024. The company has not sacrificed the quality of development for the speed of development, strived to achieve growth on the basis of maintaining product structure optimization and channel health, and the price of Guojiao 1573 remained stable. We believe that the company's core competitiveness on the channel and brand side is outstanding. Gaojiao will continue to maintain steady growth in the future, while low-level Guojiao will continue to benefit from trends such as sub-high-end expansion, upward price band fission, and lower alcohol consumption to maintain elastic growth; the specialty series has also entered a stage of scale increase after being adjusted in the past two years, and the long-term trend is improving.

Profit forecast and investment rating: Considering the current overall weak consumer demand, we lowered the company's profit forecast. We expect the company's revenue for 2024-2026 to be 31.8/34.2/36.5 billion yuan respectively, net profit to mother is 13.9/14.8/15.8 billion yuan, EPS is 9.42/10.03/10.70 yuan respectively, corresponding PE is 14/14/13 times, respectively, but considering that the company is a leader in the liquor industry and has a strong brand and channel base, The business trend is still positive on a long-term basis, so the “buy” rating is maintained.

Risk warning: 1) the pace of consumption recovery is being suppressed; 2) increased market competition has led to increased costs; 3) Liquor prices have declined due to drastic economic fluctuations; 4) the pace of product upgrades falls short of expectations; 5) food safety risks.