China Baijiu Sector: Initiating Coverage of Sichuan Swellfun, Jiugui Liquor, and Anhui Yingjia

We initiate coverage on three narrow-moat-rated China baijiu producers Sichuan Swellfun 600779, Jiugui Liquor, and Anhui Yingjia, with fair value estimates of CNY 71, CNY 82, and CNY 61, respectively. We think Sichuan Swellfun is undervalued, while Jiugui is fairly valued, and Anhui Yingjia is slightly overvalued as of market close on Oct. 11. We continue to like the premium baijiu segment, as we expect demand for premium baijiu to remain more resilient, despite short-term economic swings. Wide-moat-rated Wuliangye Yibin is our top pick in the China baijiu sector, offering the best risk/reward, in our view. We believe its strong brand heritage, supreme product quality, and extensive distribution network have fortressed its competitiveness, allowing it to generate economic profits in the long run.

We believe the baijiu sector’s premiumization trend is a long-term tailwind for distillers and leading players are better-positioned to benefit. However, China’s prolonged economic slowdown has led to a divergent performance of distillers in the near term. Our channel checks suggest demand for premium baijiu remains relatively resilient, as wholesale prices are stable and inventory levels stay healthy. However, subpremium brands are suffering from headwinds, as demand is closely tied to overall economic conditions. Meanwhile, we see decent demand growth for midrange products, which benefit from increased demand for socializing. As such, we expect wide-moat-rated Moutai, Wuliangye, Luzhou Laojiao, Shanxi Fen Wine, and Jiangsu Yanghe to continue to deliver double-digit year-on-year net profit growth in the second half of 2023, while subpremium brands Swellfun and Jiugui would see muted earnings growth. In addition, we expect narrow-moat Anhui Gujing and Yingjia to both benefit from robust regional economic expansion and post strong 20%-25% year-on-year revenue and net profit growths in the second half of 2023.