Company Reports

Despite sluggish consumer confidence in China, wide-moat firms Luzhou Laojiao, Wuliangye, and Kweichow Moutai all posted decent 2023 results, with net profit rising 23%, 13%, and 19% year over year, respectively. The results were largely within our expectations, as premium baijiu continued to enjoy resilient demand, underpinned by its unique cultural status, strong brand heritage, and supreme product quality. We continue to believe the China baijiu sector’s premiumization trend remains a tailwind to leading baijiu distillers, boding well for long-term profit outlook of premium baijiu. We maintain our fair value estimates of Laojiao at CNY 259 per share, Wuliangye at CNY 196, and Moutai at CNY 1,780, after minor tweaks to our earnings forecasts. Luzhou Laojiao and Wuliangye are our preferred names in the sector currently, offering the best risk/reward in our view, while the shares of Moutai are fairly valued.

Wuliangye Yibin is the second-largest distiller in the premium Chinese baijiu market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and over 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

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.

We maintain our fair value estimate for wide-moat Wuliangye at CNY 196 per share, despite the company’s weaker-than-expected second-quarter results, with sales growth decelerating to 5.1% year over year from 13.0% in the prior quarter, weaker than the 20.4% sales growth at peer Kweichow Moutai. We think this reveals some headwinds from the sluggish macro conditions. However, we think Wuliangye has proactively optimized its product strategy and channel structure, allowing it to be better positioned for the channel restocking process ahead of the expected pick-up in demand for October Golden Week. We think the shares are slightly undervalued as of Aug. 28, and the recent share price weakness is a buying opportunity.

Wuliangye Yibin is the second-largest distiller in the premium Chinese baijiu market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and over 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

We maintain our fair value estimate of CNY 196 per share for wide-moat Wuliangye, following its in-line 2022 and first-quarter 2023 earnings. The results revealed steady double-digit sales growth for Wuliangye, despite COVID-19 disruptions and sales pressure on the baijiu sector that led to a 19% year-over-year cut in production volume in the first quarter. First-quarter operating cash flow is also a highlight, with cash received from product sales rising 108% year over year to CNY 28.6 billion and advanced payment increasing 53% to CNY 5.5 billion, outpacing revenue growth for the quarter. Our recent channel check indicates Wuliangye has completed more than 60% of its full-year sales target as of end-April, and inventory remained at a healthy level of 1-1.5 months. We think all these suggest solid demand for Wuliangye’s products, and distributors remain confident in the demand outlook.

Wuliangye Yibin is the second-largest distiller in the premium Chinese baijiu market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and over 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

Wide-moat-rated Moutai’s preliminary first-quarter revenue and profits were slightly ahead of our expectations, with revenue and net profit rising 18% and 19% year over year, compared with our forecast of 16% and 17% revenue and bottom-line growth, respectively. We think the decent rise suggests that premium baijiu continues to enjoy resilient demand, helping to ease concerns over its growth outlook. We expect the leading premium baijiu producers, including Wuliangye Yibin and Jiangsu Yanghe, to continue posting 13%-16% year-over-year top-line growth, and 15%-20% rise in recurring net profit in the first quarter, as product mix and a shift toward direct-to-customer sales channels will likely lift operating margins. We maintain our fair value estimates for Moutai at CNY 1,680 per share, Wuliangye at CNY 196, and Yanghe at CNY 177. And we think the shares are fairly valued as of market close on April 14.

China removed all COVID-19 restrictions and opened its borders on Jan. 8, which we believe will improve consumption sentiment. Although the baijiu sector as a whole is still facing sales pressure, we think increased demand for socializing, along with premium baijiu’s irreplaceable position in the Chinese drinking culture, will help to support steady sales growth for leading baijiu brands. We lift our recurring 2023 net profit forecasts for Moutai, Wuliangye and Yanghe by 1%-5% to CNY 73 billion, CNY 31 billion and CNY 11 billion, respectively, driven by a slightly higher sales volume assumption. Accordingly, we raise fair value estimates by 2%-4% for our baijiu coverage, specifically, Moutai to CNY 1,620 per share from CNY 1,580; Wuliangye to CNY 196 from CNY 188; and Yanghe to CNY 177 from CNY 170. However, we think the shares are fairly valued as of market close on Jan. 18, and investors could wait for a better entry.

Wuliangye Yibin is the second-largest distiller in the premium Chinese spirits (baijiu) market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

Wide-moat Wuliangye’s third-quarter performance was largely in line with our expectations; it revealed resilient demand for premium baijiu despite interruptions from sporadic lockdown measures in China. Cash flow was also healthy; operating cash flow grew 33% from a year ago and advanced payment increased almost 60% from second quarter. All these suggest that demand for Wuliangye remains solid. We are maintaining our fair value estimate of CNY 188 per share and full-year 2022 net profit forecast of CNY 26.8 billion, representing 15% year-over-year growth. We also maintain our five-year net profit compound annual growth rate assumption of 14.2% but slightly lower our 2023 net profit forecast by 2% to CNY 30.5 billion, as China will probably extend its “zero-COVID” strategy, which may interrupt baijiu sales. The shares appear undervalued as of the Oct. 28 market close. We think Wuliangye's high-quality products, extensive history, and brand strength will position the firm well to benefit from China’s expanding prosperity over the long term.

Wuliangye Yibin is the second-largest distiller in the premium Chinese spirits (baijiu) market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

Chinese baijiu companies will report third-quarter results in late October, and we expect the leading premium baijiu producers, including Kweichow Moutai, Wuliangye Yibin, and Jiangsu Yanghe, to continue posting 10%-15% year-over-year top-line growth, and 10%-20% rise in recurring net profit in the quarter, as product mix upgrade and a shift toward direct-to-customer sales channels will likely lift operating margins. Despite disruptions from the sporadic lockdown measures in China, we think a slightly improved consumption sentiment, and demand for socializing, along with premium baijiu’s irreplaceable position in the Chinese drinking culture, will support steady sales growth of premium baijiu. Our recent channel checks show demand for premium baijiu is resilient, wholesale prices are stable, and inventory levels remain healthy. We believe the earnings of the three premium baijiu names are well on track to meet our full-year expectations, and we maintain fair value estimates of Moutai at CNY 1,580 per share, Wuliangye at CNY 188, and Yanghe at CNY 170.

Wide-moat Wuliangye Yibin’s first-half net profit of CNY 15.1 billion was largely in line with our expectations, which implies slower second-quarter growth, partly due to widespread shutdowns in the quarter. We think pent-up demand for socializing, coinciding with the coming of peak holiday season in September and October, will drive an accelerating sales growth in the second half, and our recent channel check also indicates a decent recovery as COVID-19 lockdowns ease. We maintain both our fair value estimate of CNY 188 per share, and our full-year net profit forecast of CNY 26.8 billion. We think the shares are fairly valued as of market close on Aug. 25, and at the current price levels, we think Jiangsu Yanghe Brewery offers slightly better risk/reward amid a stronger growth outlook after a two-year consolidation of its sales channels.

Wide-moat Wuliangye’s full-year net profit of CNY 23.4 billion was in line with our expectations, which implies slower second-half growth, owing to channel destocking and weaker demand due to COVID-19 shutdowns. We think price hikes of both ex-factory and retail prices of the flagship 52-degree Wuliangye are a key catalyst for the group in 2022, while rising competition in premium baijiu at the price levels of CNY 1,000-CNY 1,500 per bottle should mean that Wuliangye will need to maintain disciplined volume supply to strengthen its pricing power. We tweaked our 2022 net profit forecast to CNY 26.8 billion, a 2% cut from our previous forecast, to reflect slightly lower sales volume for the year, but are maintaining our CNY 188 fair value estimate, underpinned by the assumption of a steady net profit compound annual growth rate of 14.2% during 2021-26. We think the shares are fairly valued presently.

Wuliangye Yibin is the second-largest distiller in the premium Chinese spirits (baijiu) market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

We raise our fair value estimate of Kweichow Moutai to CNY 1,580 per share from CNY 1,490, as we see positive moves of Moutai that will strengthen its competitiveness and enhance earnings and long-term growth as well as boosting investor confidence. These include a more comprehensive product mix, which will help to attract more diversified consumer groups and sustain its leading market share. In addition, Moutai made its first disclosure of monthly operating performance on March 7, which will help to boost investors' confidence amid more transparent disclosure and improved company governance. As such, we lift our net profit growth assumption to a five-year CAGR of 14.3%, up from 13.9% in our previous forecast, driven by a growing mix of mid- to high-end product offerings.

Wuliangye’s third-quarter revenue and net profit rose 10.6% and 11.8%, respectively, a significant slowdown from the 20% revenue growth and 26% net profit growth posted in the first half of 2021. This is disappointing, which reflects a higher base a year ago and a relatively weaker consumption environment amid the pandemic related impacts. In addition, we think the company pushed more supply to channels in the first half, which led to destocking in the third quarter. Nevertheless, cash flow remains robust, and cash received from sales increased 59.4% year over year, outpacing revenue growth. Recent channel feedback shows inventory fell to less than one month, and more than 90% of the full year target was completed. In addition, wholesale price is also stable at CNY 970-CNY 980 per bottle. Distributors remain confident in Wuliangye's demand outlook, and we estimate full year sale volume to rise 10% from a year ago.

Wuliangye Yibin continued its strong growth momentum in first-half 2021 as revenue and net profit rose 20% and 26% year over year, respectively. The results were in line with our expectations, as the company has been focusing on strengthening channel management, increasing sales in higher-margin direct-to-customer and corporate group purchases, as well as optimizing product mix. We think these actions position it well amid rising household incomes and consumption upgrades in China. We maintain our fair value estimate of Wuliangye at CNY 188 per share, and we expect a healthy uptick in Wuliangye’s average selling prices over the next five years, which will sustain an average of 16.6% net profit growth over the next five years.