Strong sales momentum in 4Q21

■ King’s Luck issued a positive profit alert for FY21F. Sales grew by 23–27% yoy to Rmb6.3bn–6.5bn, and net profit rose by 21–34% yoy to Rmb1.9bn–2.1bn, above our expectations and the Company’s previous guidance of sales of Rmb5.9bn–6.6bn and net profit of Rmb1.8bn–1.9bn. The detailed results will be released on 16 Apr.
■ Given the baijiu consumption upgrade trend, we expect King’s Luck, as the second-largest baijiu player in Jiangsu province, to continue to maintain strong sales growth momentum of 25–30% yoy in 1Q22F and achieve 25% yoy sales growth in FY22F.
■ Reiterate Add with a higher DCF-based TP of Rmb68.

Strong sales in 4Q21 driven by continued product mix upgrade

The Company said the better performance in FY21 was driven mainly by steady sales growth and product structure optimization. The Company’s premium and above products with an ex-factory price above Rmb300 per bottle achieved 35% yoy sales growth in FY21, and their sales contribution improved from 60% in FY20 to c.65% in FY21. The upgraded version of its key premium product Guoyuan 4Kai (国缘四开), with a retail price of Rmb558 per bottle was successfully introduced and achieved strong volume growth. Its high-end series Guoyuan V (国缘 V 系), aimed at the super-premium baijiu market, grew 120% yoy in 9M21 and contributed 10% of total sales. Sales of another key premium product, King’s Luck Diancan 20/30 (今世缘典藏 20/30), rose rapidly by 235% yoy in 9M21. Based on the Company’s updated guidance, we expect sales to grow over 21% yoy in 4Q21 and net profit to rise by 30% yoy.

Ambitious layout for high-end market penetration

The Company held its 2022 distributor conference on 29 Dec 2021. It has worked hard on its home market expansion and achieved strong growth in 74 markets in 13 prefectural cities. Sales in its weak markets, Lianyunguang (连云港),Nantong (南通) and Suqian (宿 迁), also improved significantly, growing by 41%/34%/29% yoy in 9M21. Currently, the Company has 20 distributors with annual sales of more than Rmb100m, for a net increase of six distributors in FY21. In outside new markets, the Company has over 30 distributors with annual sales above Rmb10m, for a net increase of 18 distributors in FY21. The Company also announced that it set up a V99 distributors alliance, choosing 1–3 distributors from each prefecture level city, with a maximum of 99 members. These members can participate in the Company’s V series marketing strategy, with marketing guidance and various types of training, to help the Company promote its super-premium products. The first batch of this alliance will involve 38 distributors. The Company aims to achieve sales of Rmb15bn in FY25F, for a 24% CAGR in FY21–25F. Sales in outside markets are expected to contribute 20% in FY25F (9M21: 7%).

Upcoming share option plan for better growth potential

On 30 Nov 2021, the Company announced the completion of its share repurchase plan, which is for a future management incentive scheme. The Company spent Rmb433m to repurchase 7.7m shares (0.6% of total outstanding shares). The average repurchase price was Rmb56.24 per share. We expect the share option plan to be launched soon and the management team to be better motivated to increase the Company’s market share.

Reiterate Add with a higher DCF-based TP of Rmb68

We raised our EPS forecast for FY21F–23F by 2.8%-3.9%, reflecting margin improvement through premiumisation. We reiterate our Add rating, as the Company’s brand name is stronger in its home market, and its current brand image should strongly boost sales in new markets surrounding Jiangsu province. Downside risks include intense competition in the market for baijiu with a retail price of Rmb500–1000 per bottle.