Company Reports

Jiugui Liquor has differentiated itself from China’s other leading baijiu brands by producing Fuyu-flavored baijiu, which enjoys strong cultural links with minority groups in its home in western Hunan province, and has a unique brewing technique and aroma. Its established brand is now synonymous with Fuyu baijiu, providing the group with pricing power, making it one of the key subpremium baijiu brands in China. Expanding its distribution network, and increasing investment in marketing and branding, have also fortressed its competitiveness—which should allow it to generate economic profits well into the future.

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, 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.

Jiugui Liquor has differentiated itself from China’s other leading baijiu brands by producing Fuyu-flavored baijiu, which enjoys strong cultural links with minority groups in its home in western Hunan province, and has a unique brewing technique and aroma. Its established brand is now synonymous with Fuyu baijiu, providing the group with pricing power, making it one of the key subpremium baijiu brands in China. Expanding its distribution network, and increasing investment in marketing and branding, have also fortressed its competitiveness—which should allow it to generate economic profits well into the future.

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.

Jiugui Liquor has differentiated itself from China’s other leading baijiu brands by producing Fuyu-flavored baijiu, which enjoys strong cultural links with minority groups in its home in western Hunan province, and has a unique brewing technique and aroma. Its established brand is now synonymous with Fuyu baijiu, providing the group with pricing power, making it one of the key subpremium baijiu brands in China. Expanding its distribution network, and increasing investment in marketing and branding, have also fortressed its competitiveness—which should allow it to generate economic profits well into the future.