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Better growth prospects for regional player

  • King’s Luck announced that sales in 3Q21 grew by 16% yoy to Rmb1.48bn and net profit rose by 24% yoy to Rmb364m, above our estimates, driven mainly by margin improvement from its product structure upgrade.
  • We believe the Company will continue to benefit from the baijiu consumption upgrade in the Jiangsu market, and we now expect sales to grow by 14% yoy in 4Q21F and 25% yoy in FY22F.
  • Reiterate Add with a higher DCF-based TP of Rmb64.

Stable sales growth for premium baijiu

The Company’s premium baijiu products with an ex-factory price above Rmb300 per bottle and its mid-range products with an ex-factory price of Rmb100–300 per bottle grew by 16% and 18% yoy, respectively, in 3Q21, contributing 66% and 26% of total sales in 9M21 (60% and 30% in FY20). The Company has exhibited an obvious product structure optimization tend, driven by the baijiu consumption upgrade in the Jiangsu market. Low-end baijiu products below Rmb100 per bottle had positive sales growth of 4% yoy in 3Q21, accounting for 8% of total sales. Advances from customers grew by 36% yoy, but declined 42% qoq in 3Q21, due to the Covid-19 impact. We expect distributor orders to gradually rebound in 4Q21. We now expect sales to grow by 14% yoy in 4Q21F.

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Benefiting from premium baijiu expansion

In Jul and Aug, there were Covid-19 cases in Nanjing and Yanchen, Jiangsu Province, which severely affected the Company’s sales in those markets. Sales in the Nanjing market declined by 2% yoy in 3Q21 after positive sales growth of 30% yoy in 1H21, and correspondingly its sales contribution dropped from 28% in 1H21 to 22% in 3Q21. Sales in Yanchen grew by only 7% yoy in 3Q21 (18% yoy in 1H21), with a 12% sales contribution. The remaining markets in Jiangsu province continued their upward trend, growing by 25% yoy in 3Q21, driven by the baijiu consumption upgrade in the Jiangsu market. The Company’s total sales in Jiangsu grew by 15% yoy in 3Q21 (31% yoy in 1H21), contributing 93% of total sales. Sales in new markets grew by 24% yoy in 3Q21, along with its distributor expansion. At the end of 3Q21, King’s Luck had 600 distributors in new markets, a net increase of 52 distributors YTD. The number of distributors in Jiangsu Province remained fairly stable at 407. We think the baijiu consumption upgrade trend in Jiangsu Province will continue for the next 2–3 years, and as the second-largest baijiu player in the Jiangsu market, King’s Luck will benefit from this trend.

Margin improvement from product structure upgrade

The Company’s GPM improved by 1.1% pts to 72.8% in 9M21, mainly due to the improved sales contribution from premium baijiu products. The distribution expenses ratio declined by 1.1% pts to 12.5% in 9M21, as marketing activity was reduced in Jiangsu Province due to the Covid-19 impact in 3Q21. In 4Q21F, we expect the Company to increase its product promotion activities to prepare for the upcoming Chinese New Year peak sales season in 1Q22 and expect the distribution expenses ratio to be 15.9% in FY21F. The G&A expenses ratio dipped slightly by 0.2% pt to 3.3% in 9M21. The NPM rose by 0.5% pt to 31.9% in
9M21. On 1 Nov, the Company announced that it will use no more than Rmb518m in cash to repurchase 6.6m–7.7m shares (0.5%–0.6% of its total outstanding shares) within one year. All repurchased shares will be used for an equity incentive program. The repurchase price will be no more than Rmb67.27 per share. We believe the share option plan will improve management motivation, boost sales growth, and enhance the Company’s operational efficiency in the long term.