China Baijiu Earnings: Laojiao Continues to Shine, Swellfun Is Recovering

Despite current sluggish consumption in China, wide-moat Luzhou Laojiao 000568 and narrow-moat Sichuan Swellfun both posted decent third-quarter results, with net profit rising 29.4% and 19.6% year on year, respectively. The results were largely within our expectations, as premium baijiu continued to enjoy resilient demand, while expansion nationally has further boosted sales growth. We expect the solid growth momentum for both companies to continue in the coming quarters, boding well for a strong start in 2024. We maintain our fair value estimates of Laojiao at CNY 259 per share and Swellfun at CNY 71, and at the current levels, we think both shares of Laojiao and Swellfun are slightly undervalued.

We continue to believe China’s baijiu sector premiumization remains a long-term tailwind to baijiu distillers. Among the nine baijiu companies we cover, Luzhou Laojiao and Wuliangye are our preferred names currently, offering the best risk/reward, in our view. We believe the two companies’ strong brand heritage and supreme product quality—as well as their extensive distribution networks and deepening co-operation with distributors—will continue to fortress their competitiveness, allowing them to generate economic profit in the long run.

China baijiu companies’ third-quarter results reflect solid demand for premium brands and mainstream-focused products. Laojiao, one of China’s three premium brands, has benefited from both the resilient demand for premium baijiu and an aggressive national expansion strategy. This has led to 25.2% year-on-year revenue growth in the cumulative nine months, outpacing Moutai’s 18.5% growth and Wuliangye’s 12.1%. In addition, cash flows were also robust. The nine months of cash received from product sales rose 35.7% from a year ago, and advance payment at the end of the third quarter also increased 55.8% from a quarter ago. We maintain our full-year net profit forecast of CNY 12.8 billion in 2023, representing 23.1% year-on-year growth.