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.

Luzhou Laojiao, founded in 1955 from a group of 36 ancient brewing workshops dating back to the Ming and Qing dynasties, is now one of the top three premium baijiu distillers in China. As the original rich-flavored baijiu distiller, the company enjoys a rich legacy that few other baijiu producers have. We believe Laojiao’s hard-to-replicate aged cellars, classic brewing technique, and centuries of history of producing quality products have established a strong competitive advantage in brand strength and pricing power. Its extensive distribution network and deepening cooperation with distributors have also fortressed its competitiveness, allowing it to generate economic profits well into the future.

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, wide-moat Luzhou Laojiao and narrow-moat Sichuan Swellfun both posted decent third-quarter results, with net profit rising 29.4% and 19.6% year on year, respectively. The results were largely within our expectations, as premium baijiu continued to enjoy resilient demand, while expansion nationally has further boosted sales growth. We expect the solid growth momentum for both companies to continue in the coming quarters, boding well for a strong start in 2024. We maintain our fair value estimates of Laojiao at CNY 259 per share and Swellfun at CNY 71, and at the current levels, we think both shares of Laojiao and Swellfun are slightly undervalued.

Despite headwinds from the sluggish macroeconomic conditions, wide-moat Luzhou Laojiao and Jiangsu Yanghe both posted decent first-half results, with recurring net profit rising 28% and 16% year over year, respectively. We think the results suggest premium baijiu continues to enjoy resilient demand, while a solid premiumization trend and expansion into the nationwide market have further boosted sales growth. We continue to believe mix- and volume-driven revenue growth, along with margin expansion amid product premiumization, are the long-term tailwinds for distillers, and leading players are better-positioned to benefit. We think both companies are well on track to meet our full-year earnings forecasts, and we maintain our fair value estimate of CNY 259 per share for Luzhou Laojiao and CNY 177 per share for Yanghe.

We initiate coverage on China baijiu producers Luzhou Laojiao, Shanxi Fen Wine, and Anhui Gujing, with fair value estimates of CNY 259, CNY 246, and CNY 225 per share, respectively. We think Laojiao and Fen Wine are undervalued relative to our fair value estimates, while Gujing is fairly valued as of market close on June 30. We continue to like the premium baijiu segment, as we expect demand for premium baijiu to remain solid amid China’s expanding prosperity in the long term, despite short-term economic swings. We also believe the sector’s premiumization is a long-term tailwind for distillers, and leading players are better positioned to benefit. Among the six baijiu companies we cover, Luzhou Laojiao is our top pick in the sector, due to its strong brand heritage, supreme product quality, extensive distribution network, and deepening co-operation with distributors, which have also fortressed its competitiveness, allowing it to generate the long-term economic profits that underpin our wide moat rating.

Luzhou Laojiao, founded in 1955 from a group of 36 ancient brewing workshops dating back to the Ming and Qing dynasties, is now one of the top three premium baijiu distillers in China. As the original rich-flavored baijiu distiller, the company enjoys a rich legacy that few other baijiu producers have. We believe Laojiao’s hard-to-replicate aged cellars, classic brewing technique, and centuries of history of producing quality products have established a strong competitive advantage in brand strength and pricing power. Its extensive distribution network and deepening cooperation with distributors have also fortressed its competitiveness, allowing it to generate economic profits well into the future.