Kweichow Moutai Earnings: Decent Growth Reaffirms Moutai’s Leadership in China Baijiu Sector

We maintain our fair value estimate of CNY 1,680 per share for wide-moat Kweichow Moutai 600519, following the release of the company’s decent first-quarter results. The results revealed that demand for Moutai remains resilient, despite the pressure on the baijiu sector as a whole that led to a 19% year-over-year cut in production volume in the quarter. We keep our 2023 net profit forecast of CNY 73.0 billion. We think the shares are fairly valued as of market close on April 25.

The robust sales on its iMoutai app are the key growth driver in the first quarter (officially launched on March 31, 2022), bringing in CNY 4.9 billion in sales revenue. This also drove sales from the direct-to-customer channel channel, up 63.6% from a year ago, and making up 46.0% of total sales. Sales through the traditional distributor channel remained lackluster, falling 2.2% from a year ago. The sales mix shifts toward the DTC channel also helped to lift the overall selling price and a slightly widened gross margin of 92.7%, up 0.14 percentage point from a year ago.

We continue to expect Moutai to benefit from the twin drivers of: 1) steady demand growth, underpinned by Moutai’s premium quality and its irreplaceable position in Chinese drinking culture; and 2) rising average selling prices, driven by a shift to higher-margin DTC channels. In addition, a more comprehensive product mix upgrade of series products, particularly the expanding sales of high-end series product Moutai 1935, would accelerate sales growth of series products and widen margins. We think all these would further strengthen Moutai’s competitiveness in the baijiu market and enhance earnings and long-term growth. We maintain our forecast for Moutai’s net profit to grow at a five-year CAGR of 13.7% over the next five years.