Swellfun Earnings: Stronger Growth of Mid- to High-End Products and Cost Optimization Lifts Profits

Despite demand headwinds for subpremium baijiu firms, narrow-moat Sichuan Swellfun’s second-quarter results improved meaningfully on a sequential basis with revenue and net profit rising 16.6% and 29.6% year over year, up from 9.4% and 16.8% growth in the prior quarter. These were largely in line with our expectations. We think the firm has done a good job by shifting its strategic focus to promote its mid- to high-end product Zhenniang No. 8 to address challenges in the subpremium segment. This, coupled with greater efforts in optimizing sales and marketing costs has boosted net margin and profit growth. Our channel check indicates the firm’s inventory levels remain at about two months, which is healthy and should pave the way for Swellfun to benefit from upcoming restocking demand ahead of the Mid-Autumn Festival and National Day in China. We maintain our earnings forecasts and fair value estimate of CNY 66 per share. We think the shares are currently undervalued.