China Baijiu Sector: Premium Baijiu Continues To Enjoy Steady Growth on Resilient Demand

Wide-moat-rated Moutai’s 600519 preliminary first-quarter revenue and profits were slightly ahead of our expectations, with revenue and net profit rising 18% and 19% year over year, compared with our forecast of 16% and 17% revenue and bottom-line growth, respectively. We think the decent rise suggests that premium baijiu continues to enjoy resilient demand, helping to ease concerns over its growth outlook. We expect the leading premium baijiu producers, including Wuliangye Yibin and Jiangsu Yanghe, to continue posting 13%-16% year-over-year top-line growth, and 15%-20% rise in recurring net profit in the first quarter, as product mix and a shift toward direct-to-customer sales channels will likely lift operating margins. We maintain our fair value estimates for Moutai at CNY 1,680 per share, Wuliangye at CNY 196, and Yanghe at CNY 177. And we think the shares are fairly valued as of market close on April 14.

The baijiu sector has underperformed the broader market recently, with share prices of Moutai, Wuliangye and Yanghe dropping 4%-10% quarter to date, compared with the 2% rise of the Shanghai-Shenzhen 300 Index. We think this reflects market concerns over the slower-than-expected sales recovery at the Spring Food and Drinks Fair and the sector’s growth outlook. Although the baijiu sector as a whole is still facing sales pressure, we think increased demand for socializing, along with premium baijiu’s irreplaceable position in the Chinese drinking culture, will help to support steady sales growth for leading baijiu brands. Our recent channel checks show demand for premium baijiu is resilient, wholesale prices are stable, and inventory levels remain healthy. We believe the first-quarter sales of the three premium baijiu names we cover are well on track to meet our full-year expectations.