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.

We maintain our fair value estimate of CNY 1,780 per share for wide-moat Kweichow Moutai, following the firm’s in-line 2023 results and robust growth outlook. We expect it to post both a solid 19% year-over-year revenue and net profit growth in 2024, supported by multiple drivers that include resilient demand growth, ex-factory price hike from Nov. 1, 2023, rising share of sales through higher margin direct-to-customer, or DTC, channels, as well as expanding sales of premium Moutai products and high-end series product Moutai 1935. We think all these will further strengthen Moutai’s leadership in China’s baijiu market and enhance long-term earnings growth. After fine-tuning our model, our earnings forecasts are largely unchanged. We expect Moutai to deliver a five-year net profit CAGR of 12.7% through 2023-28.

As China's most distinguished spirit brand, Kweichow Moutai has remarkable pricing power, premium product quality, a long history, and unparalleled brand strength. Its premium position is reflected in its 67% operating margin and 74% return on invested capital over the past five years between 2018 and 2023. The Chinese government’s sweeping anticorruption initiative since 2012 has squeezed short-term sales of premium spirits in 2014-15. However, Moutai has recovered quickly from 2016 with an average of 16% net profit growth over the past five years. Moutai remains a leading brand in China's culinary and consumption culture, and we believe it will continue its premium position over the long term.

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.

Wide-moat Moutai’s special dividend of CNY 19.11 per share is a slightly positive surprise to the market. The company’s profitability and cash flows are robust, so the move is easily afforded by Moutai. This is the second time that Moutai is paying a special DPS, following the first in November 2022. The total payment of the planned special DPS is equivalent to CNY 24.0 billion. Together with our forecast 2023 final DPS payment of CNY 30.11 per share, or CNY 39.1 billion in total, the combined amount will be CNY 63.1 billion, equivalent to 83.8% of our forecast full-year 2023 net profit. The total DPS for 2023 will be CNY 50.22 per share, implying a yield of 2.9% based on the Nov. 20 share price.

As China's most distinguished spirit brand, Kweichow Moutai has remarkable pricing power, premium product quality, a long history, and unparalleled brand strength. Its premium position is reflected in its 66% operating margin and 133% return on invested capital over the past five years between 2017 and 2022. The Chinese government’s sweeping anticorruption initiative since 2012 has squeezed short-term sales of premium spirits in 2014-15. However, Moutai has recovered quickly from 2016 with an average of 18.5% net profit over the past five years. Moutai remains a leading brand in China's culinary and consumption culture, and we believe it will continue its premium position over the long term.

Wide-moat Moutai raised its ex-factory price by 20% for the flagship 53-degree Moutai Liquor from Nov. 1. This is the first price hike since 2018, when the firm lifted its ex-factory price to CNY 969 per 500 milliliter bottle from CNY 818. The timing came in earlier than our expected mid-2024 and the rate is higher than our assumption of 10%. This is encouraging, given the current sluggish consumption in China, and which we think reaffirms Moutai’s strong competitiveness and leading position in the baijiu market. Given that the hike will not affect direct-to-customer channels, which make up 44% of the firm’s total baijiu sales, we estimate this will increase Moutai’s average selling price by 4%-5%. We lift our five-year net profit CAGR to 15.1% between 2022 and 2017, up from 14.8% in our earlier assumptions, and we raise our fair value estimate to CNY 1,780 per share from CNY 1,730, accordingly. We think the shares are fairly valued as of the Oct. 31 market close.

Wide-moat Moutai’s headline third-quarter results were slightly disappointing, with net profit growth slowing to 15.7% year on year, from 21.0% in the first half. We think this largely reflects a seasonal adjustment in supply, while the decent cash flow, particularly a 21% year-on-year growth in cash received from product sales and a CNY 4.6 billion increase in advanced payment to CNY 12.8 billion from a quarter ago, indicates that demand for Moutai is robust. The data bodes well for its fourth-quarter 2023 and first-quarter 2024 sales growth, in our view. We keep both our fair value estimate of CNY 1,730 per share, and our full-year net profit forecast of CNY 75.0 billion, representing 19.7% year-on-year growth in 2023.

We raise our fair value estimate of Kweichow Moutai to CNY 1,730 per share from CNY 1,680, following the company’s decent second-quarter results, which revealed robust demand for Moutai and premium baijiu, despite the sluggish economy. The results were slightly ahead of our expectations, and we think product structure upgrade—with increased supply of premium Moutai products and high-end series product Moutai 1935—was the key boost. We expect Moutai to extend robust growth momentum in the second half and we raise our 2023 net profit forecast by 3% to CNY 75 billion. However, we think its shares are fairly valued, as of the Aug. 3 market close. And at the current levels, we think Luzhou Laojiao and Yanghe may offer a slightly better risk/reward, amid accelerating growth and a relatively lower valuation currently.

As China's most distinguished spirit brand, Kweichow Moutai has remarkable pricing power, premium product quality, a long history, and unparalleled brand strength. Its premium position is reflected in its 66% operating margin and 133% return on invested capital over the past five years between 2017 and 2022. The Chinese government’s sweeping anticorruption initiative since 2012 has squeezed short-term sales of premium spirits in 2014-15. However, Moutai has recovered quickly from 2016 with an average of 18.5% net profit over the past five years. Moutai remains a leading brand in China's culinary and consumption culture, and we believe it will continue its premium position over the long term.

We maintain our fair value estimate of CNY 1,680 per share for wide-moat Kweichow Moutai, following the release of the company’s decent first-quarter results. The results revealed that demand for Moutai remains resilient, despite the pressure on the baijiu sector as a whole that led to a 19% year-over-year cut in production volume in the quarter. We keep our 2023 net profit forecast of CNY 73.0 billion. We think the shares are fairly valued as of market close on April 25.

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.

We raise our fair value estimate for wide-moat-rated Kweichow Moutai slightly to CNY 1,680 per share, from CNY 1,620 per share, after the company’s in line 2022 results and robust growth outlook. We expect Moutai to post a 16.5% year-over-year net profit growth in 2023 to CNY 73.0 billion, up slightly from our earlier forecast of CNY 72.5 billion. We expect Moutai to continue to benefit from twin drivers: 1) steady demand growth, underpinned by Moutai’s premium quality and its irreplaceable position in the Chinese drinking culture; and 2) rising average selling prices, driven by a shift to higher margin direct-to-customer, or DTC, channels. In addition, a more comprehensive product mix upgrade of series products, particularly the expanding sales of high-end series product Moutai 1935, will accelerate sales growth of series products and widen margins. We think all these will further strengthen Moutai’s competitiveness in the baijiu market and enhance earnings and long-term growth. We expect Moutai’s net profit to grow at a five-year CAGR of 13.7% over the next five years.

As China's most distinguished spirit brand, Kweichow Moutai has remarkable pricing power, premium product quality, a long history, and unparalleled brand strength. Its premium position is reflected in its 66% operating margin and 133% return on invested capital over the past five years between 2017 and 2022. The Chinese government’s sweeping anticorruption initiative since 2012 has squeezed short-term sales of premium spirits in 2014-15. However, Moutai has recovered quickly from 2016 with an average of 18.5% net profit over the past five years. Moutai remains a leading brand in China's culinary and consumption culture, and we believe it will continue its premium position over the long term.

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.

As China's most distinguished spirit brand, Kweichow Moutai has remarkable pricing power, premium product quality, a long history, and unparalleled brand strength. Its premium position is reflected in its 64% operating margin and 193% return on invested capital over the past five years. The Chinese government’s sweeping anticorruption initiative since 2012 has squeezed short-term sales of premium spirits in 2014-15. However, Moutai has recovered quickly from 2016 with an average of 26% net profit over the past five years. Moutai remains a leading brand in China's culinary and consumption culture, and we believe it will continue its premium position over the long term.

Moutai’s headline third-quarter results were slightly disappointing, with net profit growth slowing to 15.8% year over year from 20.8% growth in the first half, but we think this largely reflects a transitory impact of a higher business tax. Excluding the tax impact, Moutai’s bottom line should have risen 19.9% year over year, revealing resilient demand for premium baijiu, despite sporadic lockdowns, in line with our expectations. In addition, cash flows were decent and advanced payment rose to CNY 11.8 billion, up 22.4% from the prior quarter and almost 30% from a year ago, suggesting demand remains robust. We keep both our fair value estimate of CNY 1,580 per share, and full-year net profit forecast of CNY 62.6 billion, representing 19% year-over-year growth in 2022.

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.

We maintain our CNY 1,580 fair value estimate for wide-moat Kweichow Moutai following the company’s in-line first-half results, which revealed that demand for Moutai remains resilient despite some disruptions from COVID-19 lockdowns. We maintain our net profit compound annual growth rate assumption of 14.3% over the next five years. The shares appear slightly overvalued presently; we think Yanghe offers slightly better risk/reward amid accelerating growth and a relatively lower valuation currently.

We maintain our fair value estimate of wide-moat Moutai at CNY 1,580 per share, following the company’s in-line first-quarter results, which reaffirmed our view that Moutai’s profit growth will accelerate in 2022, with increased base liquor supply a key boost. Other noteworthy data points in the report include: 1) sales from direct-to-customer, or DTC, channel, rose to 33.7%, up from 22.6% in full year 2021, a mix benefit due to higher selling prices compared to the traditional sales channel through distributors; and 2) sales of series baijiu growth of 29.7% from a year ago, compared with the 17.4% growth of core Feitian Moutai. We think the expanding product offerings, particularly the launch of high-end series product Moutai 1935 in January 2022, will help to attract more diversified customer groups and expand income streams. We think all these positives will strengthen Moutai’s competitiveness in the baijiu market and support our investment thesis of a robust long-term growth outlook for Moutai. We maintain our net profit growth CAGR assumption of 14.3% over the next five years. The shares are fairly valued presently.