Company Reports

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.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the midrange to premium segment and enjoys sound profitability, with operating margin of 40% on average over the past five years.

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.

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.

Yanghe’s decent 2022 results were in line with our expectations, but growth in the first quarter of 2023 was slightly behind our outlook. We think a high inventory level at the end of 2022 was the key drag, but our channel check indicated the company has successfully lowered inventory to a healthy 1.5-2 months after an aggressive destocking effort. This should help to pave the way for accelerating growth in the coming quarters. We maintain our earnings forecasts and our fair value estimate of CNY 177 per share. We think the shares are slightly undervalued as of the April 26 market close amid a solid growth outlook through midcycle.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the midrange to premium segment and enjoys sound profitability, with operating margin of 41% on average over the past five years.

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.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the mid-range to premium segment and enjoys sound profitability, with operating margin of 42% on average over the past five-year average.

Wide-moat Yanghe's decent third-quarter results were broadly in line with our expectations, which continue to reflect robust profit growth following a two-year consolidation of sales and distribution channels. In addition, gross margin also improved 952 basis points from the quarter prior, boosted by stronger sales growth of premium products, which is in line with our expectations and helped to ease market concern over slower sales growth of its premium Dream Blue M6+ and associated margin pressure. We maintain both our fair value estimate of CNY 170 per share, and our full-year recurring net profit forecast of CNY 9.4 billion, representing 25.5% year-over-year growth. We maintain our five-year recurring net profit growth CAGR of 12.8% between 2021 and 2026. We think the shares of Yanghe are undervalued as of market close on Oct. 28, amid a solid growth outlook through midcycle.

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.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the mid-range to premium segment and enjoys sound profitability, with operating margin of 42% on average over the past five-year average.

Wide-moat Jiangsu Yanghe’s solid first-half results were largely in line with our expectations, which revealed accelerating profit growth following a two-year consolidation of sales and distribution channels. In addition, advance payment from distributors also increased to CNY 7.9 billion as of end-June, up CNY 2.4 billion from the same period a year ago, suggesting demand remains robust and distributors are gaining confidence in Yanghe. We maintain both our fair value estimate of CNY 170 per share and our earnings forecasts—we expect decent growth of Dream M6+ in the second half, along with double-digit sales growth of Sky Blue and Ocean Blue to drive a robust 26% year-over-year growth in the company’s recurring net profit, to CNY 9.4 billion in 2022. We think the shares are fairly valued as of market close on Aug. 26. At the current price levels, Yanghe remains our preferred baijiu name, amid stronger growth momentum in the second half.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the mid-range to premium segment and enjoys sound profitability, with operating margin of 42% on average over the past five-year average.

We maintain our fair value estimate of CNY 170 per share, following Jiangsu Yanghe Brewery's in-line 2021 core operating performance and robust first-quarter 2022 results, which revealed accelerating profit growth following efforts during the last few quarters to consolidate its distribution channels and sales team. We maintain our full-year 2022 recurring net profit forecast of CNY 9.4 billion, and we expect Yanghe’s recurring net profit to grow at a five-year CAGR of 12.8% through 2021-26, with expanding sales of the flagship premium product Dream M6+ the key growth driver. We think the shares are fairly valued currently.

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.

Wide-moat Yanghe’s decent third-quarter results were largely in line with our expectations, which signal the company is ready to accelerate its growth following a few quarters’ efforts on consolidating its distribution channels and restructuring its management and sales team. Third-quarter revenue and recurring net profit rose 17% and 23% year over year, respectively, and the cumulative nine-month recurring net profit was 4.9% higher than the pre-pandemic level in the third quarter of 2019. We maintain our full year revenue and net profit forecasts, as well as our five-year net profit CAGR assumption of 11.5% through 2025, with accelerating sales of the flagship premium product Dream M6+ the key growth driver. Our fair value estimate of CNY 170 per share is intact, and we think the shares are fairly valued presently.

Wide-moat Yanghe’s decent first-half results were largely in line with our expectations, which reflects the continued progress amid the company’s reform efforts on consolidating its distribution channels and restructuring management and sales team. First-half revenue and recurring net profit rose 16% and 21% year over year, respectively, with second-quarter net profit growth further accelerated to 28% from a year ago. We maintain our full year 2021 revenue and net profit forecasts, while lifting our five-year net profit CAGR assumption slightly to 11.5% through 2025, from 10.9%, amid accelerating sales of the flagship premium product Dream M6+. We expect Yanghe focus on promoting its premium Dream series to continue to improve its product mix and margins, while streamlining the midrange products.

Jiangsu Yanghe Brewery has become China's third-largest distillery by revenue since its IPO in 2009. Thanks to its strong brand equity and solid management execution, Yanghe has become the leader in the mid-range to premium segment and enjoys the second-best profitability among peers--its 43% historical five-year average operating margin is much higher than the 20% industry average.