Stronger top line and better expenses control
- Luzhou Laojiao announced that revenue grew 24.1% yoy to Rmb5,352m and net profit was up by 29.0% yoy to Rmb2,656m in 2Q22, above our expectation, due to a stronger top line and better expenses control.
- We expect Luzhou Laojiao to maintain solid growth momentum in 2H22F, with sales and net profit growth of 16% and 10% yoy.
- Reiterate Add, given Laojiao’s strong growth momentum and large potential to improve its product mix.
- We raise our DCF-based TP to Rmb316, as we raised our FY22–24F EPS forecasts.
2Q22 results better than we expected
Revenue grew by 25.2% yoy in 1H22 to Rmb11,664m, and net profit was up by 30.9% to Rmb5,532m, both above our expectations. As one of the top three super premium baijiu brands in China, Laojiao’s 1H22 top-line growth was stronger than Moutai’s 17.4% and Wuliangye’s 12.2%, reflecting the company’s successful distribution channel reforms. According to the China Statistical Bureau, total baijiu output volume grew slightly by 0.4% yoy in China, indicating that all top three players gained market share. Laojiao achieved strong sales growth in the northern, eastern and south western China areas, while its sales in Henan and north western China were impacted by the Covid outbreak in 1H22.
Continuous mix upgrade trend and penetration into new channels
In 1H22, the sales volume of the company’s mid- to high-end baijiu products grew by 22.5% yoy, while that for its mid- to low-end baijiu products dropped by 11.3%, indicating a strong mix upgrade trend. Revenue of its mid- to high-end baijiu products grew by 26.2% yoy, and that for its mid- to low-end baijiu products grew by 20.5%, indicating ASP improvement of 3.7% and 31.8% yoy, respectively. Based on our channel check, in the mid- to high-end baijiu segment, the low alcohol content Guojiao products achieved strong growth, accounting for c.50% of segment sales volume in 1H22. Its GPM expanded by 0.3ppt yoy to 85.9% in 1H22, due to a mix upgrade. Laojiao improved its expenses control in 1H22,
with the distribution expenses ratio contracting by 2.3ppt yoy, but we expect the ratio to increase hoh in 2H22F, since Laojiao will increase marketing activity to drive sales growth.
Successful distribution channel reforms
In 1H22, Laojiao adjusted its distribution strategy. For high alcohol content Laojiao products, the company proactively controlled its sales volume to maintain relatively high wholesale and retail prices. To attract more younger customers, Laojiao promoted its low alcohol content Laojiao products in 1H22, which achieved strong growth. In May and June, along with the consumption demand recovering, Laojiao launched more marketing activities to promote brand awareness. Laojiao optimized its distributor structure in 1H22, reducing the number of distributors by 293 to 1,638. The company also successfully penetrated emerging channels, like online channels, achieving 33.9% sales growth in emerging channels and accounting for 6% of total sales in 1H22. We expect emerging channel sales to continue to grow faster than traditional wholesale channels.
Reiterate Add with a new DCF-based TP of Rmb316
We increased our FY22–24F EPS forecasts by 4.4–4.8% to reflect stronger sales growth and better expenses control. We reiterate our Add rating, given Laojiao’s strong growth momentum and large potential to improve its product mix. A catalyst would be better margins in 2H22, which would drive earnings growth. A key risk is slower-than-expected revenue growth due to weak macro. Our TP is derived from a DCF valuation with 9.6% WACC and a 3% terminal growth rate (details on P2).