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

Wide-moat Shanxi Fen Wine’s 600809 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.

Fen Wine remains one of our preferred baijiu names. Its success in the Qinghua series has led to rising popularity of light flavored baijiu. We expect the solid demand in its home market and aggressive national expansion to continue to drive robust sales growth in the mid-to-long term. But the shares are fairly valued as of the Oct. 27 market close. At the current levels, we think Luzhou Laojiao and Wuliangye may offer a slightly better risk/reward, amid a more resilient demand growth in the premium baijiu segment and a relatively lower valuation.

Despite a slowdown in revenue growth, Fen Wine’s net profit continued to rise robustly by 27.1% year on year to CNY 2.7 billion in the third quarter. This is slightly ahead of our expectation of 20%-22% growth, boosted by a sharply 5.8% lowering in the selling expense/revenue ratio compared with a year ago. We think this is in part because of an adjusted sales rebate policy to distributors, with the expense likely to rise in the fourth quarter. With cumulative nine-month revenue rising 20.8% from a year ago, we think Fen Wine is well on-track to achieve its 20% annual sales growth target.