Kweichow Moutai Earnings: Sales Growth Accelerates, Fair Value Estimate Raised 3%

We raise our fair value estimate of Kweichow Moutai 600519 to CNY 1,730 per share from CNY 1,680, following the company’s decent second-quarter results, which revealed robust demand for Moutai and premium baijiu, despite the sluggish economy. The results were slightly ahead of our expectations, and we think product structure upgrade—with increased supply of premium Moutai products and high-end series product Moutai 1935—was the key boost. We expect Moutai to extend robust growth momentum in the second half and we raise our 2023 net profit forecast by 3% to CNY 75 billion. However, we think its shares are fairly valued, as of the Aug. 3 market close. And at the current levels, we think Luzhou Laojiao and Yanghe may offer a slightly better risk/reward, amid accelerating growth and a relatively lower valuation currently.

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 sales mix shift to higher-margin direct-to-customer, or DTC, channels. In addition, a more comprehensive product mix upgrade, particularly the expanding sales of premium Moutai products and high-end series product Moutai 1935, should accelerate the 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. And we expect the company’s net profit to grow at a five-year CAGR of 14.8% through 2022-27, up from 13.7% in our earlier forecast.