China Baijiu Earnings: Premiumization and Nationwide Expansion Are the Key Growth Drivers

Despite headwinds from the sluggish macroeconomic conditions, wide-moat Luzhou Laojiao and Jiangsu Yanghe both posted decent first-half results, with recurring net profit rising 28% and 16% year over year, respectively. We think the results suggest premium baijiu continues to enjoy resilient demand, while a solid premiumization trend and expansion into the nationwide market have further boosted sales growth. We continue to believe mix- and volume-driven revenue growth, along with margin expansion amid product premiumization, are the long-term tailwinds for distillers, and leading players are better-positioned to benefit. We think both companies are well on track to meet our full-year earnings forecasts, and we maintain our fair value estimate of CNY 259 per share for Luzhou Laojiao and CNY 177 per share for Yanghe.