Kweichow Moutai Earnings: A Slightly Weaker Period but Robust Cash Flow Suggests Demand Is Intact

Wide-moat Moutai’s 600519 headline third-quarter results were slightly disappointing, with net profit growth slowing to 15.7% year on year, from 21.0% in the first half. We think this largely reflects a seasonal adjustment in supply, while the decent cash flow, particularly a 21% year-on-year growth in cash received from product sales and a CNY 4.6 billion increase in advanced payment to CNY 12.8 billion from a quarter ago, indicates that demand for Moutai is robust. The data bodes well for its fourth-quarter 2023 and first-quarter 2024 sales growth, in our view. We keep both our fair value estimate of CNY 1,730 per share, and our full-year net profit forecast of CNY 75.0 billion, representing 19.7% year-on-year growth in 2023.

We continue to like Moutai—its unique cultural status, unmatched brand image, and outstanding product quality make it best positioned to benefit from China’s beverage premiumization trend over the midterm. In addition, the extremely high distributor margin of 150%-200%, compared with 10%-15% at its baijiu peers, should provide sufficient buffer against the current sluggish consumption in China. Following the recent share price weakness, we think the shares are fairly valued as of the Oct. 20 market close. We prefer a larger discount before buying.

Moutai’s operating revenue and net profit rose 14.0% and 15.7% year on year to CNY 33.7 billion and CNY 16.9 billion, respectively, in the third quarter. These numbers are slightly below our expectation of 16% revenue growth and 18% net profit growth. Sales of core Moutai products and series products rose 14.6% and 11.7%, respectively. Sales from direct-to-customer channels continued to grow fast, rising 35.3% year over year in the quarter, outpacing the 1.5% growth at traditional distributors, and making 44.1% of total baijiu sales revenue. With cumulative nine-month revenue rising 18.5% from a year ago, we think Moutai is well ahead to achieve its 15% annual sales growth target.