China Baijiu Earnings: Demand Remains Robust, Supports Our Preference for Premium and Leading Brands

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 000596 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.

We continue to believe China’s baijiu sector premiumization remains a long-term tailwind to baijiu distillers. Among the nine baijiu companies we cover, Luzhou Laojiao and Wuliangye are our preferred names currently, offering the best risk/reward, in our view. We believe the two companies’ strong brand heritage, supreme product quality—as well as extensive distribution network and deepening co-operation with distributors—will continue to fortress their competitiveness, allowing them to generate economic profit in the long run.

In line with our expectations, demand for premium baijiu remains resilient, and wide-moat Wuliangye’s sales growth accelerated to 17.0% year over year in the third quarter, following a weaker second quarter. Nevertheless, sluggish consumer confidence has led to divergent performances of subpremium baijiu distillers—wide-moat Yanghe saw a slower revenue growth of 11.0% in the quarter, compared with 15.7% in the first half, which we think is still decent. Narrow-moat Jiugui’s sales, however, have yet to recover, and continued to fall by a sharp 36.7% from a year ago.