Description of the event

Hengshun Vinegar announced its 2024 three-quarter report. The company's 2024Q1-3 gross revenue was 1.531 billion yuan (-6.51% YoY); net profit to mother was 0.12 billion yuan (-13.08% YoY), after deducting non-net profit of 0.106 billion yuan (-19.72% YoY). The company's total revenue for 2024Q3 was 0.527 billion yuan (+5.64% YoY); net profit to mother was 26.4545 million yuan (YoY +79.99%), after deducting non-net profit of 24.184 million yuan (+75.35% YoY).

Incident comments

Demand for vinegar is still under pressure. Most other products have achieved positive growth, and the core market is recovering faster. Revenue by product: 2024 Q1-3 vinegar series 0.976 billion yuan (YoY -5.19%), single 2024Q3 (YoY -0.3%); wine series 0.263 billion yuan (YoY +2.18%), single 2024Q3 (YoY +0.23%); sauce series 0.136 billion yuan (YoY -10.13%), single 2024Q3 (YoY +26.11%); other 0.123 billion yuan (YoY -30.9%), single 2024Q3 (+23.29% YoY). Revenue by war zone: Northern War Zone 0.125 billion yuan (-15.52% YoY), single 2024Q3 (YoY -12.98%); Eastern Warzone 0.397 billion yuan (YoY -6.44%), single 2024Q3 (YoY +6.19%); Northern Jiangsu Warzone 0.186 billion yuan (YoY -8.88%), single 2024Q3 (YoY +25.71%); Southern Jiangsu Battlefield: 0.439 billion yuan (YoY -5.52%), single 2024Q3 (YoY) +12.38%); Southwest Warzone 0.199 billion yuan (-3.91% YoY), single 2024Q3 (YoY -16.78%); Central Warzone 0.153 billion yuan (YoY -9.46%), single 2024Q3 (YoY +2.06%). After experiencing core personnel adjustments from 2024Q1 to 2024Q2, the business rectification came to an end. The core product, vinegar, is still facing growth pressure. The 2024Q3 decline has remained close to flat, and most other products have achieved positive growth. From a regional perspective, improvements have been made in the core war zones (within the province and East China).

The gross margin base is low, 2024Q3 profits have improved significantly, and cost investment has increased. The company's 2024Q1-3 net profit margin fell 0.59pct year-on-year to 7.85%. Among them, gross margin was +3.42pct yoy to 36.22%, and the period expense ratio was +4.94pct yoy to 26.92%, with detailed changes: sales expense ratio (+3.63pct yoy), management expense ratio (+0.57pct yoy), R&D expense ratio (+0.73pct yoy), financial expense ratio (+0.01pct yoy), taxes and surcharges (+0.23pct yoy).

Looking at 2024Q3 alone, the company's net profit margin increased 2.07 pct to 5.02% year on year, with gross margin +9.47 pct to 35.61% year on year, and the period expense ratio +7.12 pct year on year to 28.72% year on year. Among the detailed changes were: sales expenses ratio (+6.04 pct year over year), management expenses rate (-0.04 pct year over year), R&D expenses rate (+0.89 pct year over year), financial expenses ratio (+0.23 pct year over year), taxes and surcharges (year on year +0.33 pct). The large year-on-year increase in gross margin was mainly due to a sharp increase in direct marketing in 2023Q3 (increased competition and the company took the initiative to clear long-tail SKUs), which led to an abnormal decline in gross margin. The gross margin in 2024Q3 also increased by 3.15 pct year on year. Cost improvements and superimposed promotions returned to a steady state, and continuous improvement can be expected; at the same time, marketing expenses increased a lot in 2024Q3, which is also expected to be due to intense industry competition. The company increased more marketing expenses to support the return of revenue to growth.

Additional production capacity has entered trial production, and medium- to long-term management improvements can be expected. The company has gone through management adjustments and changes, firmly implemented the deepening and upgrading of state-owned enterprises, strengthened product planning to focus on the simultaneous development of the three major categories of “vinegar, wine, and sauce”, focused on superior resources to target products, specifications, and channels, and accelerate the nationwide layout of the market. In the third quarter, the company raised capital to invest in the “0.1 million ton rice wine and cooking wine construction project (expansion)” and the “Yunyang Company Intelligent Condiment Production Project with an annual output of 0.1 million tons (first phase project)” were completed and entered the trial production stage. The company's net profit for 2024/2025 is expected to be 0.133/0.204 billion yuan, EPS 0.12/0.18 yuan, respectively, and the corresponding PE is 70/45 times, respectively, maintaining a “buy” rating.

Risk warning

1. Risk of slow demand recovery; 2. Industry competition further exacerbates risks; 3. Risk of changes in consumer consumption habits, etc.