In 1955, soldiers stationed in Xiao'erbulake Town, Xinjiang, brewed the first pot of liquor on the grassland with rudimentary equipment, marking the beginning of the liquor-making industry in Xinjiang and the start of Yilite's development, known as 'Xinjiang's First Liquor' and 'Saishang Maotai'. Recently, Yilite disclosed its 2023 annual report and 2024 first-quarter report. Notably, net profit doubled in 2023.

However, reviewing its past performance, despite a 105.53% increase in net profit, it has not yet returned to 2020 levels.

Furthermore, issues such as consecutive missed targets, poor expansion outside Xinjiang, and low gross margins continue to plague Yilite. When can it break free from its 'small and beautiful' scale and truly expand beyond Xinjiang?

Consecutive Missed Performance Targets

Lowered '14th Five-Year Plan' Revenue Target Yilite's 2023 annual report shows revenue of 2.231 billion yuan, a year-on-year increase of 37.46%; net profit attributable to shareholders of 340 million yuan, up 105.53%; total profit of 458 million yuan.

Image / Yilite 2023 Annual Report

Additionally, in 2023, Yilite's deducted net profit and operating cash flow both achieved triple-digit growth compared to the same period last year. From this perspective, Yilite's development speed in 2023 was relatively fast, and its performance can be considered quite good.

But compared to the target set in 2022, the 2023 performance still falls short.

Previously, in the 2022 annual report, Yilite mentioned that in 2023, the company aimed to achieve operating revenue of 2.5 billion yuan (consolidated) and total profit of 480 million yuan (consolidated). In comparison, the actual results for 2023 did not meet this target.

In fact, this is not the first time Yilite has missed its targets.

In 2020 and 2021, Yilite's performance targets were revenue of 2.3 billion yuan and total profit of 550 million yuan. However, actual revenue was 1.802 billion yuan and 1.938 billion yuan, with total profits of 464 million yuan and 459 million yuan, respectively.

In 2022, Yilite raised its revenue target to 2.35 billion yuan, maintaining the total profit target at 550 million yuan. But actual revenue was 1.623 billion yuan and total profit was 241 million yuan, a larger gap from the target compared to the previous two years.

Thus, the 2023 target set by Yilite, compared to previous years, saw an increase in revenue but a decrease in total profit. Regardless, the company ultimately failed to achieve its goals.

Additionally, from 2020 to 2022, Yilite's net profit declined consecutively: 342 million yuan, 313 million yuan, and 165 million yuan, with 2022 net profit nearly halved, down 47.10% year-on-year.

Yilite attributed this to the impact of the pandemic as a force majeure, as well as technical upgrades in brewing, the commissioning of the headquarters R&D center and supporting facilities, rising raw material costs for brewing, and significant increases in advertising and promotional expenses.

This also means that the doubling of net profit in 2023 can be understood as a recovery in performance, but it has not yet returned to 2020 levels.

Indeed, Yilite is well aware of its difficulties, repeatedly stating that the challenge lies in the increasing difficulty of expanding markets outside Xinjiang. Perhaps for this reason, at the 2022 annual shareholders' meeting held in June 2023, Chairman Chen Zhixiu revised the '14th Five-Year Plan' (2021-2025) revenue target from 5 billion yuan to 3.5 billion yuan, a reduction rarely seen in the industry.

Given current performance, to achieve the 3.5 billion yuan target, Yilite's revenue needs to grow by more than 50% within two years.

In the 2023 annual report, Yilite proposed a new performance target for 2024: operating revenue of 2.8 billion yuan (consolidated) and total profit of 495 million yuan (consolidated).

Based on this, if the target is successfully achieved this year, it means the company's revenue needs to grow by approximately 25% for two consecutive years to complete the '14th Five-Year Plan' revenue target of 3.5 billion yuan.

Looking at the actual situation over the past five years (2019-2023), revenue fluctuations have been significant: 8.36%, -21.71%, 7.53%, -16.24%, and 37.46%. Therefore, whether this year's and the '14th Five-Year Plan' targets will be successfully achieved or continue to be missed remains to be seen.

Poor Results in Expanding Outside Xinjiang

Objectively speaking, Yilite's 70-year history is not particularly long compared to other liquor companies.

Since brewing the first pot of liquor in 1955, Yilite has built multiple breweries over the following decades, as well as auxiliary enterprises such as a thermal power plant, a three-star Yilite Hotel, a printing company, a wild fruit development company, and a glass products company.

In 1999, Yilite was listed on the Shanghai Stock Exchange, becoming one of the earliest listed liquor companies in China.

This process laid the foundation for Yilite to become 'Xinjiang's First Liquor'. The company mentioned that it aims to elevate Yilite from a third-tier regional brand to a national second-tier brand within three to five years, demonstrating its determination to expand beyond Xinjiang.

Image / Photo by摄图网, based on VRF agreement

So, as mentioned earlier, how difficult is the expansion outside Xinjiang that Yilite repeatedly mentions?

Looking back at the first half of 2023, Yilite stated in its annual report that it would promote the creation of model markets outside Xinjiang in the second half of the year, focusing on key markets such as Jiangsu and Sichuan, selecting prefecture-level or county-level markets, and recruiting strategic major distributors; moving the marketing command center forward, establishing local office organizations, and operating with independent teams.

At that time, operating data showed that Yilite had 14 distributors outside Xinjiang and 215 brand operation company distributors outside Xinjiang, contributing 235 million yuan in sales revenue.

By the end of the third quarter of 2023, the number of Yilite's distributors outside Xinjiang had decreased to 11, while brand operation company distributors outside Xinjiang increased to 226, contributing 305 million yuan in sales revenue in the first three quarters.

At the end of 2023, the number of Yilite's distributors outside Xinjiang returned to 14, while brand operation company distributors outside Xinjiang decreased to 106, contributing a total of 489 million yuan in sales revenue for the year. Compared to the 1.697 billion yuan in sales revenue within Xinjiang, sales outside Xinjiang accounted for only about 28%.

Operating data for the first quarter of 2024 shows that Yilite still has 14 distributors outside Xinjiang, while Sichuan Yilite Liquor Sales Co., Ltd. has 104 cooperative distributors.

Sichuan Yilite Liquor Sales Co., Ltd. was established in the second half of 2023, primarily engaged in liquor sales, food sales, and food internet sales. On November 20 of that year, the company completed industrial and commercial registration.

That is to say, despite plans and determination to expand outside Xinjiang, the actual results show that after half a year, the number of first-tier distributors outside Xinjiang has not changed, while the number of cooperative distributors has decreased. This indicates that Yilite faces significant difficulties in its journey beyond Xinjiang.

Yilite's board secretary, Jun Jie, once stated that for markets outside Xinjiang, the company would use products with high cost-performance or distinctive features to open channels where competitors are weaker, and increase investment in e-commerce to directly connect with more consumers.

Image / Official WeChat of Xinjiang Yilite Industrial Co., Ltd.

Yilite also mentioned in its 2023 annual report that during the reporting period, it accelerated the layout of markets outside Xinjiang, increased e-commerce investment, and established live streaming teams in Beijing and Tianjin.

For 2024, Yilite plans to improve the efficiency of the Chengdu National Operations Center, optimize policies, and intensify efforts to expand markets outside Xinjiang; ensure steady growth in the Jiangsu-Zhejiang market, and quickly create 1-3 model markets with billion-yuan sales in East and Central China.

Low Gross Margin Levels

Difficulty Achieving High-End Positioning

**It is worth mentioning that Yilite admitted in its 2023 semi-annual report: 'Xinjiang is our home base market, and currently most products have not achieved full coverage across Xinjiang.' The company's CFO, Yan Jun, further stated that sales within Xinjiang account for more than 50%. Jun Jie also said that in response to intensifying industry competition, the company will increase efforts to develop the southern Xinjiang market and consolidate its position as 'Xinjiang's First Liquor'. In the 2023 annual report, the company mentioned adopting a steady strategy in the Xinjiang market: stabilizing low-end volume, increasing mid-end volume, expanding high-end volume, and ensuring key volume. Throughout the year, the production of high-end liquor, mainly Wang Liquor and Laojiao, was 5,759.55 kiloliters, a year-on-year increase of only 4.19%, while sales volume was 6,942.95 kiloliters, up 45.30% year-on-year. This move may be intended to reduce inventory. As a result, the inventory of high-end liquor was only 4.12 kiloliters, a significant decrease of 99.65% compared to the same period last year.The increase in high-end liquor sales directly drove Yilite's revenue growth. The company mentioned that the revenue change was due to product price increases, improved sales structure, and increased high-end liquor sales. Image / Yilite 2023 Annual Report

Meanwhile, low-end liquor production saw the highest year-on-year increase of 74.99%. In terms of revenue, this tier also saw the highest increase at 88.42%.

In the first quarter of 2024, this trend continued across all three tiers, with low-end liquor sales revenue growing 51.46% year-on-year, while high-end and mid-end liquor sales revenue grew 10.57% and 6.94%, respectively. However, the gross margin for low-end liquor, mainly Yili Daqu and Yili Laopengyou, is very low at only 1.69%, which is an increase of 4.54 percentage points compared to the same period last year. In fact, overall, the gross margins for all three tiers are not high.

The gross margins for high-end and mid-end liquor are 59.85% and 40.65%, respectively, with an overall gross margin of 50.52%. Among listed liquor companies, this level is only higher than Shunxin Agriculture's (liquor industry) 50.22%, Golden Seed's (liquor business) 48.85%, and Hainan Yedao's (liquor business) 39.31%. Image / Yilite 2023 Annual Report

The low gross margin issue has attracted investor attention. Recently, an investor asked on the interactive platform: 'Compared to other liquor companies, why are Yilite's gross margin and return on equity significantly lower?'

In response, Yilite stated: 'Our products generally have high cost-performance, with relatively low selling prices. The company is also actively increasing sales of high-end products.'

'Yilite is a typical regional liquor company, limited by the low consumption level and small market capacity in the northwest market,' said Cai Xuefei, a liquor industry analyst, to 'Modern Consumption'.

He mentioned that although Yilite has certain frontier brand characteristics, its influence in the national market is limited. Additionally, Yilite previously operated under a major distributor system, with the company basically not participating in national market promotion and development outside Xinjiang. Therefore, lagging brand image value and product cultivation, narrow local market, insufficient brand power, lack of high-end channels from the manufacturer, and conservative institutional systems all restrict Yilite's high-end development.

Overall, although Yilite has delivered an annual report with relatively good data and has long held the titles of 'Xinjiang's First Liquor' and 'Saishang Maotai', compared to other listed liquor companies, its overall scale and product level remain in a 'small and beautiful' pattern.

From the company's various operational plans, it is clear that Yilite has the intention to break through, but the actual results often 'fall short of expectations'.

Can such a Yilite overcome the above difficulties and achieve self-breakthrough in the future?

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