China Baijiu Earnings: Premiumization and Nationwide Expansion Are the Key Growth Drivers

Despite headwinds from the sluggish macroeconomic conditions, wide-moat Luzhou Laojiao 000568 and Jiangsu Yanghe 002304 both posted decent first-half results, with recurring net profit rising 28% and 16% year over year, respectively. We think the results suggest premium baijiu continues to enjoy resilient demand, while a solid premiumization trend and expansion into the nationwide market have further boosted sales growth. We continue to believe mix- and volume-driven revenue growth, along with margin expansion amid product premiumization, are the long-term tailwinds for distillers, and leading players are better-positioned to benefit. We think both companies are well on track to meet our full-year earnings forecasts, and we maintain our fair value estimate of CNY 259 per share for Luzhou Laojiao and CNY 177 per share for Yanghe.

Luzhou Laojiao is our preferred name among baijiu companies we cover, due to its strong management and quality product portfolio—with premium product National Cellar 1573 and midrange product Luzhou Tequ a twin driver for long-term growth. We believe the company’s strong brand heritage, supreme product quality, as well as its extensive distribution network and deepening co-operation with distributors, will continue to fortress its competitiveness. However, following the recent share price uptick, we think the shares of Luzhou Laojiao are fairly valued as of the Aug. 28 market close, while Yanghe and Wuliangye are undervalued and offer a slightly better risk/reward at the current levels.

We expect premium baijiu to extend the strong growth momentum into the second half of 2023. Our recent channel check with distributors indicates leading brands have completed more than 70% of full-year sales targets, wholesale prices are stable, and inventory levels remain healthy. All these should have paved the way for the channel restocking process ahead of the Mid-Autumn Festival and National Day holidays.