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Company Profile　　Shede Spirits Co., Ltd., formerly Sichuan Tuopai Shede Spirits Co., Ltd., is a China-based company, principally engaged in the production and distribution of liquor products.　　The Company primarily provides Tianzhihu, Tunzhihu, Shede, Taozui, Tuopai Tianqu, Tuopai Tequ, Tuopai Youqu and Tuopai Daqu liquor. In addition, the Company also involves in the manufacture and distribution of pharmaceutical products. The Company distributes its products mainly in Suining and Chengdu, Sichuan province.　　（Source: Reuters）。　　Event　　Shede Spirits （“the company”） releases its 2022 annual report.　　The company reported CNY6.056 billion in revenue for 2022, a year-on-year increase of 21.86%.　　The company reported CNY1.685 billion in net profit attributable to shareholders for 2022, a year-on-year growth of 35.31%.　　For 4Q22, the company reported CNY1.439 billion and CNY485 million in revenue and net profit attributable to shareholders, up 5.62% and 75.87% year-on-year, respectively.　　Comments　　Despite the disruption of the epidemic, the company still achieved steady and high growth for 2022. The company’s 2022 revenue from wine reached CNY5.656 billion, a year-on-year growth of 23.58%.　　In terms of wine grades, the revenue from high-end and low-end wine was CNY4.877 billion and CNY780 million yuan, respectively, up 25.88% and 10.92% year-on-year.　　In terms of regions, the revenue within and outside its local province was CNY1.612 billion and CNY4.045 billion yuan, respectively, up 13.48% and 28.12% year-on-year. The proportion of revenue from outside its local province rose by 2.54pps to 71.51%.　　In terms of channels, the number of the company’s distributors reduced by 94 to 2,158 at the end of 2022, a net drop of 144 within the local province and a net growth of 50 outside its local province. The average sales revenue of a single distributor amounted to CNY2.62 million, a year-on-year growth of 29%.　　Considering the company’s priority on turnover and control of inventory, it had relatively low requirements on the payment of new distributors, so the actual sales revenue of a single distributor was likely higher. The company’s expenses were better allocated, which boosted its profitability.　　The 2022 net profit margin was up 2.51pps year-on-year to 28.08%. Specifically, the gross margin was 77.72% and stable, but the sales expense ratio was down 0.84pps year-on-year to 16.78%, and the management expense ratio was down 2.44pps year-on-year to 9.69%. The expenses were optimized and the　　profitability improved significantly.　　At the end of 2022, the balance of contract liabilities was CNY298 million, down CNY64 million QoQ and CNY360 million YoY, mainly due to the delivery and invoice settlement in 2022 of some prepayments in 2021.　　In 2022, the sales collection was CNY6.014 billion, up 0.19% year-on-year. The net operating cash flow was CNY1.041 billion. This was mainly due to higher payment of goods, employee payrolls and taxes affected by the pace of sales.　　In addition, the net profit margin in 4Q22 was up 13.33pps year-on-year to 33.91%, of which the gross margin was down 1.31pps year-on-year to 75.75%.　　The sales expense ratio was down 6.19pps year-on-year to 13.49%, and the management expense ratio was down 11.15pps year-on-year to 5.05%, which was likely caused by narrowed expenses amid the epidemic. Equity incentives encourage the staff, and the revenue target at the level CNY10 billion is worth looking forward to.　　The company announced the draft of equity incentive on October 14, which indicated that its 2024 end-of-year revenue target is at the level CNY10 billion, showing strong determination. We are optimistic that the landing of incentives will fully stimulate the management and tap into the potential of its dual brands.　　Since Fosun took over the company in 2021, the company’s strategy has become clearer. For brand marketing, the company has firmly promoted old wine strategy and C-end priority strategy to enhance brand recognition. For channel management, the company has adhered to the model of high turnover and no inventory backlog to optimize the price system.　　At present, in the core market of Sichuan, Shandong, Hebei, Henan and northeastern China, the company has built a consistent sales base for many years, and it has ranked among the top five or even top three in terms of the market share of sub-high-end products in these regions. The experience has been successfully replicated in many cities, especially in southwester Shandong and eastern China.　　Benefiting from Fosun’s empowerment in the future, the company is expected to enhance the recognition of its old wine, expand in more cities and make breakthroughs in more scenarios.　　Earnings forecast and investment recommendation　　The company is advancing steadily after the good start in the Spring Festival. The current price system is rising, and the inventory is in a good shape. With the recovery of business and banquet moving forward, we are optimistic about the company’s recovery. The medium and long-term equity incentives are anchored at the growth pivot. Currently, the company focuses on scaling up and enhancing its position in the industry, with its growth among the top. We revise our earnings forecast based on the annual report and estimate the company’s revenue at CNY8.032 billion, CNY10.009 billion and CNY12.061 billion for 2023, 2024 and 2025 respectively.　　We also estimate its net profit attributable to shareholders at CNY2.154 billion, CNY2.723 billion and CNY3.388 billion for 2023, 2024 and 2025 respectively, implying a PE of 28.1x, 22.2x and 17.9x, based on the closing price on March 21, 2023.　　We maintain the rating of “Buy”。　　Potential risks　　Unexpected macroeconomic; slower-than-expected upgrading of sub-high-end products; intensified competition for expansion outside its local province.【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

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