Company Reports

Wide-moat Shanxi Fen Wine’s second-quarter growth slowed on a sequential basis with revenue and net profit rising 17% and 10% year over year, respectively, compared with 21% and 30% growth in the prior quarter. The results were slightly disappointing, revealing greater sales pressure of subpremium baijiu. Our channel check indicates sales growth of mainstream products and the flagship Qinghua 20 remain robust, while demand of higher-end products is weakened, amid slower economic growth in China. Inventory level stayed at 1.5-2.0 months, which is still heathy and allows the firm to benefit from upcoming restocking demand ahead of the Mid-Autumn Festival and National Day holidays in China. We expect earnings growth to pick up in the coming quarters, and the firm’s target of 20% sales growth in 2024 is achievable.

Despite sluggish consumer confidence in China, wide-moat Shanxi Fen Wine posted solid 22% and 21% year over year sales growth in 2023 and first-quarter 2024, respectively. The robust sales were largely in line with our expectations, but both 2023 and first-quarter net profit came in slightly ahead of our estimates, as lower-than-expected marketing and selling expenses helped to lift operating margins. We keep our 2024-26 revenue assumptions broadly unchanged, but we lift 2024-26 net profit forecasts by 5%-7% amid improving cost efficiencies. Accordingly, we raise our fair value estimate to CNY 259 per share, from CNY 246. We continue to believe Fen Wine is the key beneficiary of rising popularity of light-flavored baijiu in China. We expect expanding sales in the nationwide market, along with the company’s premiumization efforts, to continue to drive a robust sales growth outlook for Fen Wine over the next five years.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

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.

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.

We retain our fair value estimate of Shanxi Fen Wine at CNY 246 per share, following the firm’s in-line first-half results, which revealed robust demand with revenue and net profit rising 24% and 35%, respectively, year over year, despite the sluggish economy. More importantly, we estimate sales of the high-end Qinghua series have risen strongly by 40% from a year ago, making up 45% of total baijiu sales, reflecting a solid premiumization trend. We continue to believe mix- and volume-driven revenue growth, along with margin expansion amid product premiumization, are the key growth drivers for Fen Wine. We maintain both our full-year 2023 forecast of CNY 9.9 billion, or 22% growth from a year ago, and we expect the firm’s net profit to grow at a five-year CAGR of 21% between 2022 and 2027.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

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.

Boasting a long and rich history, Shanxi Fen Wine is known as the original distiller of light-flavored baijiu and was often mentioned in ancient and contemporary Chinese literature. We believe the extensive history and quality of products have established strong competitive advantage in brand strength and pricing power, making it the only premium brand among the light-flavored baijiu beverages. Years of channel development and deepening cooperation with China Resources, which possesses a large distribution network, have also fortressed its competitiveness, which should allow it to generate economic profits well into the future.

We are discontinuing our equity research coverage of Shanxi Xinghuacun Fen Wine Factory Co., Ltd. 600809 We provide broad coverage of more than 1,700 companies across more than 140 industries, and adjust our coverage as necessary based on client demand and investor interest.

Shanxi Fen Wine is a typical light-flavored spirit in China and has a different aroma and taste compared to sauce-flavored and rich-flavored spirits. Fen Wine lags behind sauce-flavored spirit maker Moutai and rich-flavored spirit maker Wuliangye in terms of both pricing power and market share. Revenue and profit growth accelerated in 2009 and 2010, which we attribute to a series of strategic changes in branding, products, and distribution in 2008. We believe the firm can translate its recent investments in branding and distribution into a stronger brand and a higher market share, and we expect to see continuing improvements in its business fundamentals in the coming years.