Yanghe Earnings: Despite Slower Start, Healthy Inventory Paves the Way for Accelerating Growth

Yanghe’s 002304 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.

After a few quarters’ consolidation of sales and distribution channels in 2019-20, Yanghe’s sales growth accelerated in 2021-22. Full-year 2022 revenue rose 18.8% year over year to CNY 30.1 billion and net profit grow 24.9% robustly to CNY 93.8 billion, with net margin improving 1.55 percentage points to 31.2% on a prudent cost control. Although an early Lunar New Year and high inventory of 3 months led to challenges for Yanghe’s first-quarter performance, we think the 15.5% revenue growth from a year ago and 15.7% net profit growth in the quarter are still decent, as the China baijiu sector as a whole was facing demand pressure that led to a 19% year-over-year cut in production volume in the first quarter of 2023. This should suggest demand for premium baijiu remains resilient.

Yanghe targets 15% year-over-year sales growth in 2023. Our recent channel check with distributors indicated Yanghe completed more than 50% of its full-year sales target, and inventory level is about 1.5-2 months, sharply reduced from 3 months a quarter ago. We expect Yanghe’s growth to gain momentum in the coming quarters, benefiting from the recovery of business activities and improving wedding and family dining-out demand. We expect recurring net profit to grow 17.4% year over year to CNY 11 billion in 2023.