Company Reports

Narrow-moat Anhui Gujing’s first-half results were largely in line with our expectations, with revenue and net profit rising 22% and 29% year over year, respectively. Although sales growth slowed slightly in the second quarter to 17%, we think it is still decent amid the current weak macroeconomic environment. We believe Gujing’s leadership in its home market of Anhui province positions it well as one of the key beneficiaries of the stronger local economy versus China as a whole. This should continue to drive robust demand and a solid premiumization trend for the firm’s baijiu sales. In addition, Gujing’s expansion into nationwide markets, along with improving cost efficiency, should further boost sales growth and margin expansion. We maintain both our earnings forecasts and fair value estimate of CNY 236 per share for Gujing. We think the shares are undervalued currently, underpinned by a strong five-year net profit compound annual growth rate of 16% between 2023 and 2028.

Anhui Gujing is one of the eight national well-known baijiu brands. Thanks to its strong brand heritage and deep-rooted distribution network in the regional market, Gujing has become Anhui’s largest distiller by sales since 2012 and has led the province’s premiumization via sales growth of its flagship premium Gujing Year Puree series, which allows the company to enjoy decent profitability and returns.

Despite still-sluggish consumer sentiment in China, demand for mainstream-focused leading baijiu brands remains robust. Anhui Gujing and Anhui Yingjia both posted strong 2023 and first-quarter 2024 results, with net profits slightly ahead of our expectations on accelerating mix upgrades and optimized costs. We believe Gujing’s and Yingjia’s leadership in their home market of Anhui province positioned the two companies well as the key beneficiaries of increased travelling and socializing, as well as the stronger local economy. These will continue to drive a robust demand and premiumization trend for baijiu sales, while improving cost efficiency will further boost margins.

Anhui Gujing is one of the eight national well-known baijiu brands. Thanks to its strong brand heritage and deep-rooted distribution network in the regional market, Gujing has become Anhui’s largest distiller by sales since 2012 and has led the province’s premiumization via sales growth of its flagship premium Gujing Year Puree series, which allows the company to enjoy decent profitability and returns.

We expect the China baijiu sector to extend its sluggish sales into first quarter 2024, which is reflected in lower wholesale prices and higher inventory levels for the sector as a whole compared with a year ago. However, performance was divergent across segments. Our channel checks suggest demand for premium baijiu and mainstream-focused local brands remains resilient. In contrast, subpremium brands, except Shanxi Fen Wine, have witnessed varying degrees of sales pressure, as demand is closely tied to overall economic conditions. This is mainly in line with our earlier assumptions, and we maintain both our earnings forecasts and fair value estimates for the baijiu names we cover.

Despite current sluggish consumption in China, baijiu companies’ third-quarter results reflect resilient demand for premium and mainstream-focused leading local brands. Subpremium names witnessed varying degrees of sales pressure. This is largely in line with our expectations, and we maintain our fair value estimates of Wuliangye at CNY 196 per share, Yanghe at CNY 177, Gujing at CNY 225, and Jiugui at CNY 82. We raise our fair value estimate of Yingjia to CNY 65 per share from CNY 61, to reflect a stronger-than-expected product mix upgrade. At the current levels, Wuliangye and Yanghe are undervalued relative to our fair value estimates, while Gujing, Yingjia, and Jiugui are all fairly valued or slightly overvalued. To recap, Kweichow Moutai’s September-quarter results released last week were slightly disappointing, which we think was due to seasonal factors.

Narrow-moat Anhui Gujing posted a strong set of half-year results that were in line with our expectations, with robust volume growth and mix upgrade, as well as optimized operating expenses, driving 45% net profit year-over-year growth. We believe Gujing’s leadership in its home market of Anhui province well positions it as the key beneficiary of a stronger expansion of the local economy. We believe this should drive robust demand and solid premiumization for baijiu sales, while Gujing’s national expansion, along with improving cost efficiency, should further boost sales growth and margin expansion. We maintain both our fair value estimate of CNY 225 per share and full-year 2023 forecast net profit growth of 44% to CNY 4.5 billion. However, we think the shares are slightly overvalued as of market close on Aug. 30. At the current levels, we think Yanghe and Wuliangye offer a slightly better risk/reward.

We initiate coverage on China baijiu producers Luzhou Laojiao, Shanxi Fen Wine, and Anhui Gujing, with fair value estimates of CNY 259, CNY 246, and CNY 225 per share, respectively. We think Laojiao and Fen Wine are undervalued relative to our fair value estimates, while Gujing is fairly valued as of market close on June 30. We continue to like the premium baijiu segment, as we expect demand for premium baijiu to remain solid amid China’s expanding prosperity in the long term, despite short-term economic swings. We also believe the sector’s premiumization is a long-term tailwind for distillers, and leading players are better positioned to benefit. Among the six baijiu companies we cover, Luzhou Laojiao is our top pick in the sector, due to its strong brand heritage, supreme product quality, extensive distribution network, and deepening co-operation with distributors, which have also fortressed its competitiveness, allowing it to generate the long-term economic profits that underpin our wide moat rating.

Anhui Gujing is one of the eight national well-known baijiu brands. Thanks to its strong brand heritage and deep-rooted distribution network in the regional market, Gujing has become Anhui’s largest distiller by sales since 2012 and has led the province’s premiumization via sales growth of its flagship premium Gujing Year Puree series, which allows the company to enjoy decent profitability and returns.