Wuliangye Earnings: Steady Growth Continues With Solid Demand Outlook

We maintain our fair value estimate of CNY 196 per share for wide-moat Wuliangye 000858, following its in-line 2022 and first-quarter 2023 earnings. The results revealed steady double-digit sales growth for Wuliangye, despite COVID-19 disruptions and sales pressure on the baijiu sector that led to a 19% year-over-year cut in production volume in the first quarter. First-quarter operating cash flow is also a highlight, with cash received from product sales rising 108% year over year to CNY 28.6 billion and advanced payment increasing 53% to CNY 5.5 billion, outpacing revenue growth for the quarter. Our recent channel check indicates Wuliangye has completed more than 60% of its full-year sales target as of end-April, and inventory remained at a healthy level of 1-1.5 months. We think all these suggest solid demand for Wuliangye’s products, and distributors remain confident in the demand outlook.

Wuliangye has been focusing on strengthening channel management, increasing sales in the higher-margin direct-to-customer and corporate group purchases, as well as optimizing product mix to focus on premium flagship products and streamlining midrange products. We think these strategies will help to drive moderate sales volume growth and a healthy uptick in average selling prices over the next five years. We fine-tuned our earnings forecasts and keep our 2023 net profit estimate largely unchanged at CNY 31 billion, representing 16% year-on-year growth. We expect the company’s net profit to grow at a five-year CAGR of 14.5% through 2022-27.

As of the market close on April 28, Wuliangye shares are trading at 14% discount to our fair value estimate, and we think the company’s high-quality products, extensive history and brand strength will position it well to benefit from China’s expanding prosperity in the long run.