Gujing Earnings: Robust Demand, Cost Efficiency Drive Growth Outlook, but Shares Slightly Overvalued

Narrow-moat Anhui Gujing 000596 posted a strong set of half-year results that were in line with our expectations, with robust volume growth and mix upgrade, as well as optimized operating expenses, driving 45% net profit year-over-year growth. We believe Gujing’s leadership in its home market of Anhui province well positions it as the key beneficiary of a stronger expansion of the local economy. We believe this should drive robust demand and solid premiumization for baijiu sales, while Gujing’s national expansion, along with improving cost efficiency, should further boost sales growth and margin expansion. We maintain both our fair value estimate of CNY 225 per share and full-year 2023 forecast net profit growth of 44% to CNY 4.5 billion. However, we think the shares are slightly overvalued as of market close on Aug. 30. At the current levels, we think Yanghe and Wuliangye offer a slightly better risk/reward.

First-half sales revenue rose 26% year over year, boosted by a strong 25% volume growth of its flagship Gujing Year Puree products. The sales mix shift toward high-end products also helped lift average selling prices and margins. We think Gujing is well on track to meet its target revenue of CNY 20 million in 2023. Our channel check with distributors indicated Gujing has completed more than 70% of its full-year target, with a relatively healthy inventory level of two to three months.

Although Anhui province growth should support demand, we believe intensified competition within the province and a relatively weaker distribution network in the nationwide market mean that Gujing will still need to invest heavily to strengthen its brand awareness and deepen penetration in new markets. We expect the firm’s net profit growth to slow to 20% year over year in 2024 and grow at a five-year CAGR of 23% between 2022 and 2027.