Shanxi Fen Wine Earnings: Robust Demand and Product Premiumization Continue To Drive Growth Outlook

We retain our fair value estimate of Shanxi Fen Wine 600809 at CNY 246 per share, following the firm’s in-line first-half results, which revealed robust demand with revenue and net profit rising 24% and 35%, respectively, year over year, despite the sluggish economy. More importantly, we estimate sales of the high-end Qinghua series have risen strongly by 40% from a year ago, making up 45% of total baijiu sales, reflecting a solid premiumization trend. We continue to believe mix- and volume-driven revenue growth, along with margin expansion amid product premiumization, are the key growth drivers for Fen Wine. We maintain both our full-year 2023 forecast of CNY 9.9 billion, or 22% growth from a year ago, and we expect the firm’s net profit to grow at a five-year CAGR of 21% between 2022 and 2027.

Fen Wine remains one of our preferred baijiu names, as we think the extensive history and quality of the products have established a strong competitive advantage in brand strength and pricing power, and we believe it will be the key beneficiary of the rising popularity of light-flavored baijiu. However, following a 24% uptick in its share price over the past two months, we think shares are fairly valued as of the Aug. 24 market close. And at the current levels, we think Yanghe and Wuliangye may offer a slightly better risk/reward, amid decent demand growth and a relatively lower valuation.

Fen Wine targets 20% year-over-year sales growth in 2023, and we think the company is well on track to meet this target. Our recent channel check with distributors indicates Fen Wine has completed more than 70% of its full-year sales target, with a healthy inventory level of one month. We continue to expect Fen Wine to benefit from: 1) robust demand growth amid accelerating nationwide expansion; and 2) the premiumization effort through product and mix upgrades. We think all these would further strengthen Fen Wine’s competitiveness in the baijiu market and enhance earnings and long-term growth.