Jiugui: Demand Headwind Persists for Subpremium Baijiu, Fair Value Estimate Lowered by 4%

Narrow-moat Jiugui’s 2024 first-half preliminary results were below our expectation, which continued to reflect greater sales pressure of subpremium baijiu, with revenue falling 35% year over year, and net profit declining 69%-74%. Although its second-quarter sales improved slightly on a sequential basis, our channel check indicates Jiugui’s inventory level remains high currently, with distributor inventory of home market Hunan at about two months, and ex-Hunan market at four-to-five months. This suggests destocking challenges will persist before the Mid-Autumn Festival and Chinese National Day holidays in the second half. We cut our fair value estimate to CNY 68 per share from CNY 71 to factor in the weakness. While we expect 2024 net profit to decline 13% year on year, we anticipate a recovery from 2025 onward. As a result, our five-year earnings CAGR estimate is only marginally reduced to 27.2% from 28.5%.