Strong sales growth expected in 1Q22F
? Fen Wine issued a positive profit alert for FY21. Net profit grew by 70%–80% yoy to Rmb5.23bn–5.54bn, largely in line with our expectation, driven mainly by strong sales growth in new markets and product structure optimization.
? Currently, the Omicron threat has affected several provinces in China, but the Company’s home market, Shanxi Province, and the new markets in southern and eastern China have been less impacted and the logistics service is working smoothly.
? We expect the Company to deliver strong sales growth of 25%–30% yoy in 1Q22F and 27% yoy in FY22F.
? Reiterate Add with an unchanged DCF-based TP of Rmb384.
Continued product structure upgrade to drive margin improvement
Fen Wine exhibited strong growth momentum, achieving 66% yoy sales growth in 9M21, and reached its sales target for FY21 in advance, mainly due to successful new market exploration. Since the beginning of 4Q21, the Company actively controlled product shipments, reduced channel inventory and supported the market to promote its high-end products. We expect sales growth in 4Q21F to slow down qoq. According to the Company’s updated guidance, the net profit in 4Q21 was Rmb355m–663m (-39% yoy to +15% yoy), as a significant portion of marketing expenses were incurred in 4Q as usual. For FY21, we estimate that sales of the Company’s two largest products grew strongly: 1) that the highend Qinghua brand, with retail price above Rmb500 per bottle, grew by 80%–90% yoy in FY21F, and 2) that its low-end brand, Bofen, with a retail price below Rmb100 per bottle, grew by 30%–35% yoy in FY21F, respectively contributing 30%–35% of total sales. We expect the Company’s net profit margin to improve to 25.3% in FY21F from 22% in FY20, driven by the continued product structure upgrade.
Strong sales growth likely in 1Q22F
1Q sales are important for baijiu companies, as they usually account for 30%–40% of total annual sales. Currently, the Omicron threat has impacted several provinces in China, particularly large baijiu consumption markets, like Henan (??) and Shaanxi (??) provinces. Fen Wine started shipments for the upcoming Chinese New Year on 1 Jan without any significant logistics disruptions. The Company’s key market, its home market, Shanxi Province (40% sales contribution in 9M21), and some new markets in the Yangtze River Delta area, including Jiangsu, Shanghai, and Zhejiang, have been less affected by the Omicron situation. We expect the Company to have strong sales growth of 25%–30% yoy in 1Q22F and 27% yoy in FY22F.
New chairman to continue to carry out the development strategy
On 20 Dec, the company’s chairman, Mr LI Qiuxi (???), retired, and his successor, Mr YUAN Qingmao (???), with a government background, came on board, and chaired the Company’s annual conference for distributors on 26 Dec. In the conference, Mr. Yuan made it clear that he will continue to execute the development strategy of the 14th Five Year Plan (FY21–25F), and will continue to invest in building the Company’s high-end brand image and promoting its product structure optimization. The Company will
strengthen its position in its strong markets, Shanxi province and the surrounding provinces, to deepen its market penetration. In new markets, it will concentrate on expanding in the Yangtze River Delta and Pearl River Delta, promoting its high-end Qinghua products, and improving its marketing activity and brand power. As at the end of FY21, the Company had 1m national controllable sales points, up by 18% yoy. The Company aims to achieve Rmb40bn in sales in FY25F, for an 18% yoy CAGR in FY21– 25F. We expect the Company’s margin to continue to improve, driven by a mix upgrade.