China Baijiu Sector: Initiating Coverage of Luzhou Laojiao, Shanxi Fen Wine, and Anhui Gujing

We initiate coverage on China baijiu producers Luzhou Laojiao, Shanxi Fen Wine, and Anhui Gujing, with fair value estimates of CNY 259, CNY 246, and CNY 225 per share, respectively. We think Laojiao and Fen Wine are undervalued relative to our fair value estimates, while Gujing is fairly valued as of market close on June 30. We continue to like the premium baijiu segment, as we expect demand for premium baijiu to remain solid amid China’s expanding prosperity in the long term, despite short-term economic swings. We also believe the sector’s premiumization is a long-term tailwind for distillers, and leading players are better positioned to benefit. Among the six baijiu companies we cover, Luzhou Laojiao is our top pick in the sector, due to its strong brand heritage, supreme product quality, extensive distribution network, and deepening co-operation with distributors, which have also fortressed its competitiveness, allowing it to generate the long-term economic profits that underpin our wide moat rating.