Company Reports

Despite still-sluggish consumer sentiment in China, demand for mainstream-focused leading baijiu brands remains robust. Anhui Gujing and Anhui Yingjia both posted strong 2023 and first-quarter 2024 results, with net profits slightly ahead of our expectations on accelerating mix upgrades and optimized costs. We believe Gujing’s and Yingjia’s leadership in their home market of Anhui province positioned the two companies well as the key beneficiaries of increased travelling and socializing, as well as the stronger local economy. These will continue to drive a robust demand and premiumization trend for baijiu sales, while improving cost efficiency will further boost margins.

Anhui Yingjia is one of the four “Golden Flowers” in the Anhui local baijiu market, and it produces rich-flavored baijiu with a strong focus on mainstream products. Despite a weaker brand heritage, the company has gained a reputation as one of the few natural and organic baijiu producers in the industry, successfully launching its higher-end flagship product Dongcang Yearly in 2015. This allows the company to upgrade its product mix and capture the solid premiumization trend in Anhui, and generate economic profits well into the future, in our view.

We expect the China baijiu sector to extend its sluggish sales into first quarter 2024, which is reflected in lower wholesale prices and higher inventory levels for the sector as a whole compared with a year ago. However, performance was divergent across segments. Our channel checks suggest demand for premium baijiu and mainstream-focused local brands remains resilient. In contrast, subpremium brands, except Shanxi Fen Wine, have witnessed varying degrees of sales pressure, as demand is closely tied to overall economic conditions. This is mainly in line with our earlier assumptions, and we maintain both our earnings forecasts and fair value estimates for the baijiu names we cover.

Despite current sluggish consumption in China, baijiu companies’ third-quarter results reflect resilient demand for premium and mainstream-focused leading local brands. Subpremium names witnessed varying degrees of sales pressure. This is largely in line with our expectations, and we maintain our fair value estimates of Wuliangye at CNY 196 per share, Yanghe at CNY 177, Gujing at CNY 225, and Jiugui at CNY 82. We raise our fair value estimate of Yingjia to CNY 65 per share from CNY 61, to reflect a stronger-than-expected product mix upgrade. At the current levels, Wuliangye and Yanghe are undervalued relative to our fair value estimates, while Gujing, Yingjia, and Jiugui are all fairly valued or slightly overvalued. To recap, Kweichow Moutai’s September-quarter results released last week were slightly disappointing, which we think was due to seasonal factors.

Anhui Yingjia is one of the four “Golden Flowers” in the Anhui local baijiu market, and it produces rich-flavored baijiu with a strong focus on mainstream products. Despite a weaker brand heritage, the company has gained a reputation as one of the few natural and organic baijiu producers in the industry, successfully launching its higher-end flagship product Dongcang Yearly in 2015. This allows the company to upgrade its product mix and capture the solid premiumization trend in Anhui, and generate economic profits well into the future, in our view.

We initiate coverage on three narrow-moat-rated China baijiu producers Sichuan Swellfun, Jiugui Liquor, and Anhui Yingjia, with fair value estimates of CNY 71, CNY 82, and CNY 61, respectively. We think Sichuan Swellfun is undervalued, while Jiugui is fairly valued, and Anhui Yingjia is slightly overvalued as of market close on Oct. 11. We continue to like the premium baijiu segment, as we expect demand for premium baijiu to remain more resilient, despite short-term economic swings. Wide-moat-rated Wuliangye Yibin is our top pick in the China baijiu sector, offering the best risk/reward, in our view. We believe its strong brand heritage, supreme product quality, and extensive distribution network have fortressed its competitiveness, allowing it to generate economic profits in the long run.

Anhui Yingjia is one of the four “Golden Flowers” in the Anhui local baijiu market, and it produces rich-flavored baijiu with a strong focus on mainstream products. Despite a weaker brand heritage, the company has gained a reputation as one of the few natural and organic baijiu producers in the industry, successfully launching its higher-end flagship product Dongcang Yearly in 2015. This allows the company to upgrade its product mix and capture the solid premiumization trend in Anhui, and generate economic profits well into the future, in our view.