Wuliangye Earnings: Despite Weaker-Than-Expected Growth, Outlook Is Still Promising

We maintain our fair value estimate for wide-moat Wuliangye 000858 at CNY 196 per share, despite the company’s weaker-than-expected second-quarter results, with sales growth decelerating to 5.1% year over year from 13.0% in the prior quarter, weaker than the 20.4% sales growth at peer Kweichow Moutai. We think this reveals some headwinds from the sluggish macro conditions. However, we think Wuliangye has proactively optimized its product strategy and channel structure, allowing it to be better positioned for the channel restocking process ahead of the expected pick-up in demand for October Golden Week. We think the shares are slightly undervalued as of Aug. 28, and the recent share price weakness is a buying opportunity.

Our channel check with distributors indicates demand for Wuliangye remains resilient, and the firm has completed more than 75% of its full-year sales target, with a healthy inventory level of one month. We expect Wuliangye to restore its growth momentum in the second half and only tweak our earnings forecast minimally. We expect a full-year 2023 net profit of CNY 30.6 billion, representing 14.6% year-over-year growth, and we expect the company’s net profit to grow at a five-year CAGR of 14.0% through 2022-27.

Second-quarter revenue rose 5.1% year over year to CNY 14.4 billion, and net profit grew 5.1% to CNY 4.5 billion. We think a decent 15.8% sales volume growth in core Wuliangye products was the key revenue growth driver. Demand for Wuliangye remains robust, and the expanding sales of lower-degree products, boosted by enhanced promotion campaigns, is the main reason for a 5.0% drop in average selling prices. We think this indicates a flexible marketing and product strategy amid current consumption headwinds, and we believe Wuliangye’s strong brand equity and premium product quality, along with more efficient marketing and channel strategy, should continue to drive a promising growth outlook.