Performance review

3Q24 net profit fell short of our expectations

The company released three quarterly results: 3Q24 achieved revenue of 0.758 billion yuan, -6% year over year; net profit to mother 0.172 billion yuan, -24% year over year; deducted non-net profit of 0.17 billion yuan, -22.2% year over year. 3Q24 net profit was lower than our expectations, mainly due to weak 3Q demand and increased cost investment.

Development trends

Pre-mixed wine revenue declined slightly in 3Q24, and we estimate there is still an online drag. According to the company's announcement, by product, 3Q24 pre-mixing/fragrance and other businesses achieved revenue of 0.671/0.087 billion yuan respectively, -6.6%/-0.8% over the same period. The pre-blending business continued to be relatively weak. According to CICC supermarket data, 3Q24 supermarket RIO's sales were -11.5%, of which slightly intoxicant/ strong/refreshing were -6%/-13%/+5%, respectively, and accounted for 40/36/ 15% of revenue, respectively. We expect 3Q24 growth under the strong and high base. The increase in revenue for refreshing products in 3Q24 will mainly benefit from the promotion and sale of 500ml cost-effective products. Furthermore, considering the company's strict price management, we expect the online growth rate to be weaker than offline.

Product adjustments and declining costs boosted 3Q24 gross profit margins, and rising rates led to a decline in 3Q24 net profit.

3Q24's gross margin was +1.3 pct to 70.2% year on year. We expect the main reasons: 1) factors such as reduced costs of some packaging materials and agricultural products; 2) product structure optimization and refreshing series specification adjustments. On the cost side, the 3q24 sales expense ratio was +3.1 pct. We expect it to be related to rigid cost investment and a decrease in scale effects. In addition, the 3Q24 company management/finance expense ratios were +0.3/+1ppt, respectively, and management expenses were stable. Overall, the company's net profit for 3Q24 was -24% year-on-year.

The spirits business is investing in the long term, and digital construction strengthens internal skills. According to the company's announcement, the new product launch conference on November 19 will officially announce the first batch of finished whiskey products from the Laizhou Distillery. We expect that the current organizational structure and dealer team will refer to cocktail product pricing during the construction process. We expect that the company's blended whiskey positioning is mainly a good drink that can be drunk on a daily basis.

Profit forecasting and valuation

Considering the weak revenue growth and increased expense investment in the first three quarters of 2024, we lowered 2024 net profit by 34.4% to nearly 0.745 billion yuan, and introduced a new net profit of 0.867 billion yuan in 2025. The current transaction is 36.0/30.9 times P/E in 2024/2025; considering profit forecast adjustments and recent increases in sector valuations, we maintain a target price of 32 yuan/share, corresponding to about 45/39 times 24/25 P/E and about 25.3% share price upward space. Considering that the company has strong channel, brand and single product building capabilities, it maintains an industry rating.

risks

Strong sales were under pressure, whiskey progress fell short of expectations, and the cost ratio was higher than expected.