Company Reports

Despite slower economic growth and still-sluggish consumer sentiment in China, narrow-moat Zhenjiu Lidu, or ZJLD, posted strong first-half results, with revenue and adjusted net profit rising 18% and 27% year over year, respectively. The robust growth was within our expectations, which we think is helped by the expanding sales of its core products into national markets, as well as accelerating product mix upgrade. This, along with improving cost efficiency, has further boosted margins and adjusted net profit growth.

We initiate coverage of Zhenjiu Lidu, or ZJLD, with a narrow moat rating and a fair value estimate of HKD 12.20 per share, which implies price/earnings of 20 times, and enterprise value/EBITDA of 12 times, based on our 2024 estimates. We think the shares are currently undervalued, but our preferred picks in the sector are wide-moat Wuliangye and Luzhou Laojiao, as we believe these companies will be resilient despite economic swings, underpinned by their strong brand heritage, supreme product quality, and extensive distribution networks.

Zhenjiu Lidu, or ZJLD, has differentiated itself from other China baijiu distillers by operating three distilleries under four different brands, with aromas ranging across Jiang, Rich, and Mixed flavors. It acquired the distilleries of Xiang Jiao, Li Du, and Zhen Jiu during 2003-08. Through heavy investment, ZJLD successfully built Zhen Jiu, Li Du, Xiang Jiao, and Kai Kou Xiao into leading national and regional brands, providing the group with pricing power. Expanding distribution penetration and continuing investment in marketing and branding, have also fortressed its competitiveness.