Company Reports

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

Subpremium baijiu companies continued to witness varying degrees of sales pressure in 2024 as the segment’s demand is mainly driven by business-related socializing, which is closely tied to overall economic conditions in China and sees slower demand recovery compared with premium and mass market baijiu. As such, we lower our fair value estimates of subpremium baijiu stocks—Jiangsu Yanghe to CNY 160 per share from CNY 177, Sichuan Swellfun to CNY 66 from CNY 71, and Jiugui to CNY 71 from CNY 82, to factor in the weak demand outlook. We think the shares of Yanghe, Swellfun, and Jiugui are undervalued currently, but near-term demand recovery remains uncertain amid slower domestic economic growth and soft consumer sentiment. Our preferred picks in the sector are wide-moat Luzhou Laojiao and Wuliangye as we believe these companies will be resilient despite economic swings, underpinned by their strong brand heritage, supreme product quality, and extensive distribution networks.

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.

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.

Narrow-moat-rated Sichuan Swellfun, or Swellfun, is one of the key subpremium baijiu brands in China with aged cellars dating as far back as the late Yuan dynasty. Diageo’s takeover in 2006 has further strengthened Swellfun’s strategic focus in the midrange to subpremium markets. This positions the company well amid the sector’s premiumization trend, allowing it to generate economic profits well into the future, in our view.

We are discontinuing our equity research coverage of Sichuan Swellfun Co., Ltd.600779. We provide broad coverage of more than 1,700 companies across more than 140 industries, and adjust our coverage as necessary based on client demand and investor interest.

As a renowned Chinese rich-flavor spirits brand, Sichuan Swellfun has established a solid presence in the Chinese premium white spirits market. However, its brand reputation lags that of Moutai and Wuliangye. Since Swellfun's launch in 2000, the company has faced multiple challenges, such as changes in government policies, product mixes and shareholder structure. Between 2000 and 2005, Sichuan Swellfun’s sales revenue posted year-over-year declines, but growth returned in 2005, driven by surging white spirits demand and Swellfun's growing brand reputation. However, in 2009, sales revenue had notched only a 30% increase versus ten years earlier. This compares to 300% growth in competitor Wuliangye’s sales during the same period. We believe the company's short-term outlook remains murky given the magnitude of the competitive environment. Over the medium to long term, Sichuan Swellfun's outlook will hinge on whether its performance can improve after Diageo DEO assumes a controlling interest, subject to the Chinese government’s approval. Until the unknowns regarding Sichuan Swellfun's shareholder structure are resolved, we remain conservative on the company's growth outlook.