Continuing the upward trend
? Fen Wine announced that sales in FY21 rose by 43% yoy to Rmb19.97bn and net profit
rose by 73% yoy to Rmb5.31bn, in line with our expectations.
? Despite the high base effect of 77% yoy sales growth in 1Q21 and the current Omicron
impact, the Company continued to deliver striking sales growth of 44% yoy in 1Q22,
with net profit up by 70% yoy.
? Since the Company has a more diversified product portfolio for different consumer
groups, we now expect both the Company’s sales and net profit to grow by 28% yoy,
respectively, in FY22F.
? Reiterate Add with a new DCF-based TP of Rmb358.
Fen wine brand exhibits an obvious structural upgrade trend
The Company’s baijiu sales grew by 43% yoy to Rmb19.8bn, with the ASP and sales
volume up by 15% and 24% yoy, respectively, in FY21. The core baijiu brand, Fen wine,
maintained strong growth momentum, achieving 42% yoy sales growth to Rmb17.9bn in
FY21, accounting for 90% of total sales. The Fen wine brand achieved product structure
optimization, and the sales contribution from the premium and above products, the
Qinghua series, improved by c.10% pts to 40% in FY21, while the mid-end products,
Panama and Laobaifen, and the low-end product, Bofen, contributed 30% and 20%,
respectively, of total sales in FY21. The gross margin of the Fen wine brand improved by
3.1% pts to 76.6% in FY21. The sub-brand Xinhuacun grew modestly by 13% yoy, and
sales of its blended baijiu brand, Zhuyeqing, rebounded significantly by 91% yoy in FY21,
contributing 3% and 7% of total sales, respectively.
Benefiting from baijiu consumption upgrade in its home market
The Company’s home market, Shanxi province, is on a baijiu consumption upgrade trend.
Sales in Shanxi province grew by 35% yoy in FY21, the ASP increased by 20% yoy, and
sales volume rose by 12% yoy, contributing 41% of total sales. The GPM from sales in
Shanxi province increased by 3.1% pts to 74.2%. Management said Qinghua20, with a
retail price of Rmb488 per bottle, and Panama 20, with a retail price of Rmb398, have
become more popular in Shanxi province, and it expects the consumption upgrade trend
in its home market to continue. With consistent marketing investment, the Company’s sales
in new markets also ramped quickly by 49% yoy in FY21, and its GPM in new markets rose
by 2.3% pts to 75.5% in FY21, mainly due to the improving sales contribution of Qinghua.
Limited impact from the current Omicron situation
In 1Q22, the Company’s Qinghua series continued its strong volume growth. The
Company’s sales grew by 44% yoy to Rmb9.8bn (41% of our full-year forecast), and net
profit rose by 70% yoy to Rmb3.7bn. Management said most of the product shipments
were completed in Jan for 1Q22, and the Company started to control channel inventory in
Feb and Mar. Now it has relatively low channel inventory, and management said it will
make every effort to replenish the distributors’ inventory. The first batch of products in Apr
has already been delivered. We estimate that sales in the Shanghai, Jiangsu and Zhejiang
markets, which are currently impacted by the lockdown policy, account for only 6% of the
Company’s total sales and that the Omicron impact will be manageable for the Company.
Advance payments from distributors rose by 32% yoy in 1Q22, and the number of
distributors reached 3,617 as at the end of March, for a net increase of 93 in 1Q22,
indicating effective distribution network expansion. We believe the Company’s aim of 25%
yoy sales growth in FY22F is achievable.