Charged Up For 2022

Wholesale prices of high-end baijiu remained high as the peak season is approaching. Moutai delivered moderate results for 2021, but we are still optimistic on its future results. Wuliangye and Fenjiu have initiated their plans for 2022 with passion and confidence. We believe demand for premium and sub-premium baijiu would expand steadily in the next few years, with rises in both shipments and prices. Maintain OVERWEIGHT on the baijiu sector.

WHAT’S NEW

Wholesale prices remained high as peak season is approaching. Wholesale prices of unboxed Feitian Moutai continued to hike up to Rmb2,750/bottle from Rmb2,660/bottle a month ago. Wholesale prices of boxed Feitian Moutai rebounded to Rmb3,300/bottle, after the dip to Rmb3,250/bottle on 13 December. At the same time, wholesale prices of Wuliangye stood at Rmb970/bottle, while wholesale prices for Qinghua 20/30 remained the same at Rmb377/Rmb830 per bottle from our last update.

Moderate results in 2021 with solid expansion in base liquor production. Moutai recently announced that in 2021, it produced about 56,500 tonnes of Moutai base liquor (up 12.5% yoy) and 28,200 tonnes of non-Moutai base liquor. Its total revenue is expected to grow 11.2% yoy to Rmb109b (Rmb93.2b for Moutai series and Rmb12.6b for non-Moutai series) and its attributable net profit would be at Rmb52b, up 11.3% yoy.

Wuliangye’s key achievements in 2021. The main breakthroughs include: a) Wuliangye has chopped off 80% of its non-Wuliangye products and completed the upgrade and development of its national strategic brands − Wuliangchun (五粮春), Wuliangchun (五粮 醇), Wuliang Tequ and Jianzhuang; b) it has nearly 30,000 outlets and 5,300 core terminal shops. Point-of-sales for non-Wuliangye series products grew 52.5% yoy to 665,000. Moreover, of the 30,000 key enterprises visited, 70% had signed up through “group purchase”; c) it has achieved solid sales growth in eight national key cities and 14 provincial-level key cities; and d) it has accelerated its second phase of digitalisation in marketing and generally established the digitalisation management and service system.

Wuliangye’s key work plans for 2022: a) continue to educate consumers with the focus on the 8th Generation Wuliangye and Classic Wuliangye, as well as continue to deepen strategic cooperation with international platforms such as the Boao Forum, the World Expo, and APEC summits; b) keep supply and demand in balance to enhance the market position of the 8th Generation Wuliangye and Classic Wuliangye in the price belt of Rmb1,000/bottle and Rmb2,000/bottle respectively; c) adhere to a mix of individuality and fashion to meet consumer demand in the new era, and continue to foster the low-alcoholic baijiu segment; d) continue to promote the upgrade and development of non Wuliangye series; and e) persist on co-sharing and co-building in order to develop a community with a shared future.

Fenjiu’s achievements in 2021. After the restructure of marketing organisation, Fenjiu has formed a “31 provinces + 10 direct management regions” structure and has hired 5,000 marketing personnel. As a result, the number of distributors has grown to 2,944 (vs less than 1,000 distributors in 2017), while the number of terminal controls has increased to 1m (vs less than 10,000 in 2017). The average growth rate in the south of Yangtze River markets was 60%, while Qinghua’s sales grew four ties over the last five years. Moreover, the number of markets with sales of >Rmb100m grew to 28 by the end of 2021 from eight in 2017. Such strong development has been supported and refined by the company’s effective digitalisation system.

• Fenjiu’s key plans for 2022. The company will focus on “three big markets”: a) to strengthen and push up sales volume in the large base market – the original base market (Shanxi province) will be expanded to form the large base market, which includes six core provinces – Shanxi, Beijing, Tianjin, Hebei, Shaanxi, and Shandong, b) to focus its resources in the East China market (Jiangsu, Zhejiang, Shanghai, and Anhui) which has a large potential and ensures its high-quality and high-speed development, and c) to increase terminal coverage in the South China market (Guangdong, Shenzhen, Hong Kong, Hubei and Hunan) and making it a new growth driver in 3-5 years’ time. Moreover, in the international market, it will differentiate its plans and investments according to three categories – key markets, developing markets, and potential markets. Fenjiu currently has more than 50 distributors and 8,000 terminal shops overseas.

New guidelines to further supervise “vintage liquor” production. In Dec 21, the State Administration for Market Regulation announced the drafted “Detailed Rules for Liquor Production Licensing Examination”. It stipulates that baijiu product labels should not be marked with words such as “special supply”, “special use”, or “special demand”. Moreover, baijiu products should be marked with the true stored years and proportions of the various base liquor used.

ESSENTIALS

Confidence in high-end products consumption ahead. Wuliangye and Fenjiu’s achievements and specific plans for 2022 have given us more confidence on the future consumption of high-end baijiu. Wuliangye is making the efforts to reinforce its leading market position in the price belt of around Rmb1,000/bottle and is aiming to establish a leading position in the price belt of around Rmb2,000/bottle. Fenjiu is on the correct trajectory of brand revival after its successful three-year restructure in 2017-19. We believe the resignation of Chairman Li Qiuxi would have little impact to the company’s highquality fundamentals. We reckon that they are initiating the effective strategies with caution based on their successful and failed experiences in the past years.

Little concerns on Moutai’s moderate results. We expect Moutai would maintain the double-digit earnings growth in the next few years even without price hikes for Feitian Moutai, mainly thanks to: a) increasing base liquor production (7.5% five-year CAGR for 2016-21) which would support the shipment growth in 2021-26, b) more direct sales of Feitian Moutai with higher ex-factory price, c) price hike for non-Feitian Moutai products, d) other potential indirect price hikes for Feitian Moutai, and e) development of non-Moutai series products. On the potential ex-factory price hike for Feitian Moutai, we re-iterate that the precondition would be the stable retail transaction prices. Aside from more indirect price hike moves ahead, such as additional Feitian Moutai’s quota to dealers with higher exfactory price, we do not rule out that the hike of official guided retail price will come first, which would lift profit via the direct sales channel and probably have a smaller sales market impact than the direct ex-factory price hike.

VALUATION/RECOMMENDATION

Maintain OVERWEIGHT on China’s baijiu sector. Given the consumption upgrade trend to continue, we believe the demand for premium and sub-premium baijiu would be expanded steadily in the next few years. On the shipment, we expect high-end baijiu’s sales volume to increase as more production capacity will come on stream to meet the demand. On the price, we expect further price hikes in the future. Currently Moutai, Wuliangye, and Fenjiu are trading at 42.0x, 29.9x, and 51.6x 2022F PE, which we think
are at reasonable levels given their continuous solid fundamentals.