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Better growth potential driven by share option plan

  • Laojiao announced strong sales growth of 21% yoy to Rmb4.8bn in 3Q21, and a net profit increase of 28% yoy to Rmb2.0bn, above our expectation, driven mainly by stronger sales volume of its mid- to high-end products.
  • On 27 Sep, the Company announced that it would issue an equity incentive plan for core employees. We believe this will further stimulate management initiatives and improve the Company’s long-term efficiency.
  • The Company has the potential to outperform its sales target, which it set early this year, of no less than 15% yoy growth in FY21F. We now expect sales to grow 15% yoy in 4Q21F and 21% yoy in FY22F.
  • Reiterate Add with a higher DCF-based TP of Rmb299.
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Strong growth of Cellar brand sales

Demand for the Company’s mid-range products remained strong in 3Q21 even after a price hike in 1H21. We estimate that total sales of its mid- to high-end products grew by 20%– 25% yoy in 3Q21, and contributed 85%–90% of total sales. Its low-end products and related distribution channels are still in the adjustment stage, so sales of low-end products still declined yoy in 3Q21. The overall GPM improved by 0.6% pts to 87.5% in 3Q21, mainly due to a product mix upgrade. The sales tax rate declined by 2.7% to 11.3%; we expect the sales tax rate to remain stable at 13.4% in FY21F. The distribution expenses ratio dropped by 1.3% pts to 15.7%, and we expect the Company to carry out more marketing activities in 4Q for the Chinese New Year peak season period. The G&A expenses ratio rose slightly by 0.5% pt to 5.9%, as R&D expenses rose by 88% yoy in 3Q21. The NPM improved 2.5% pts to 42.8% in 3Q21. Advances from customers grew by 55% yoy and 35% qoq in 3Q21. With the Company’s premium product sales contribution improvement and product structure optimization, we expect its NPM to gradually improve to 37%–38% in FY21F–23F.

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Equity incentive plan to provide more growth potential

On 27 Sep, the Company announced that it would issue an equity incentive plan with no more than 8.8m shares, accounting for 0.6% of the total number of shares. The plan will include no more than 521 core employees (16% of total employees), with a grant price of Rmb92.71/share. Under the current macro environment, we think the equity incentive plan will motivate its core employees and bring more vitality to improve the Company’s efficiency and ensure high-quality development in the future. The plan has set quite high performance targets for the Company’s sales and profitability in FY21F–23F. Based on our estimate,
the Company’s core earnings should grow at a CAGR of at least 25% yoy in FY21F–23F.

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New products in the premium product portfolio

The Company has basically completed the layout of national distribution coverage. Its core Cellar brand has deeply penetrated the southwest and north China markets with steady growth, and made breakthroughs in the east and south China markets. We believe sales in these new markets will gradually improve after more marketing and product promotion activities in next three years. The Company also just launched another new product – Cellar 1952 – in late Oct, targeting the Rmb600–800 per bottle baijiu market. This new product complements the Company’s premium product structure under the Cellar brand, which will drive long-term growth.