Shanxi Fen Wine Earnings: Sales Growth Slightly Slowed, but Long-Term Growth Outlook Is Intact

Wide-moat Shanxi Fen Wine's third-quarter revenue growth slowed to 13.6% year on year, from 24.0% in the first half. This is within our expectation, as sluggish consumer confidence in China has pressured demand of Fen Wine's flagship Qinghua series. The sales of midrange products continued to grow robustly, but the mix of sales has squeezed gross margin by 290 basis points from a year ago. Despite the near-term headwinds, we think China baijiu sector's premiumization remains a long-term tailwind to leading players, and Fen Wine's extensive history and product quality well position it to benefit. We maintain both our fair value estimate of CNY 246 per share and our full-year 2023 forecast of CNY 9.9 billion, or 22% growth from a year ago, and we expect the company's net profit to grow at a five-year CAGR of 21% between 2022 and 2027.