Stable sales growth likely in 2H22F
- Wuliangye announced that sales rose by 12% yoy to Rmb41bn in 1H22 and that net profit rose by 14% yoy to Rmb15bn, in line with our expectations.
- For the upcoming Sep-Oct peak season, we expect the company to increase its investment in the group purchase channel to achieve steady sales growth.
- Given Wuliangye’s healthy channel inventory of 1.5 months, we now expect the company’s sales to grow by 13.2% yoy in 2H22F and 12.6% yoy in FY22F.
- Reiterate Add with an unchanged DCF-based TP of Rmb287.
Steady volume growth for high-end Wuliangye liquor
In 1H22, the company’s high-end brand, Wuliangye, maintained steady sales growth of 17% yoy to Rmb31.9bn, accounting for 78% of total sales, driven mainly by 15% yoy volume growth. Given the high base effect of 39% yoy sales growth in 1H21 and the Covid19 impact, sales of the series brands declined by 6% yoy to Rmb6.5bn, and sales volume dropped significantly by 48% yoy in 1H22, reflecting the mix upgrade trend among the series brands. In 1H22, the company actively optimized the product structure of the series brands and focused on its mid- to high-end products. The average selling price of the series
brands improved significantly in 1H22 due to product structure upgrades. The company’s GPM improved by 2% pts to 76.9% in 1H22; of this, the GPM of the Wuliangye brand remained fairly stable at 86.4%, and that of the series brands improved by 1.8% pts to 59.8%. In 2Q22, the company’s sales grew by 10% yoy to Rmb13.7bn, and net profit was up by 10% yoy to Rmb4.3bn. The company’s channel inventory remained at a healthy level of 1.5 months, and the first-layer wholesale price stabilized at Rmb970/bottle.
Adjusting the marketing strategy due to the Covid-19 impact in 2Q22
The company has 2,404 distributors for the Wuliangye brand (a net increase of 81 YTD) and 611 distributors for the series brands. Advances from customers had declined significantly by 70% yoy as at the end of Jun. The company explained that due to Covid19 volatility in 2Q22, it reduced the prepayment proportion for distributors and optimized the order plan to lower the financial pressure on distributors. In addition, the company decentralized the marketing power in each regional market so that it can respond more efficiently to market changes. The company also increased its investment in group purchase and brand promotion activities. Its distribution expenses ratio rose by 0.5% pt yoy to 10.2% in 1H22 and 1.2% pts yoy to 15.9% in 2Q22. The company’s net profit margin remained stable yoy at 31.3% in 2Q22.
We expect a second equity-incentive scheme to be launched soon
The company strengthened the management of its sales team and improved the control of distribution channels in 2Q22. We expect Wuliangye’s brand awareness and product quality to help the company achieve steady sales growth in 2H22F. Wuliangye’s last employee share incentive plan was implemented in 2015, which helped the company achieve strong growth in the past six years. The new chairman has emphasized the reform of the marketing and management system. We expect the company to launch its second share-incentive plan in the near future.
Reiterate Add with an unchanged DCF based TP of Rmb287
We reiterate our Add rating, as we expect Wuliangye to continue to drive solid sales growth and margin improvement through a product mix upgrade and expanding its group purchase channels. A key catalyst would be stronger-than-expected sales and margin expansion. The main risk is that weak macro might reduce business consumption of premium baijiu products. Our TP is derived from the DCF valuation method with 10.2% WACC and a 3% terminal growth rate (details on page 2).
