Analysts raise a glass to quality Chinese liquor stocks

Sector’s Q1 revenue jumps 16 per cent, driven by a spirited 26 per cent surge by high-end brands

PUBLISHED : Tuesday, 21 June, 2016, 5:43pm
UPDATED : Tuesday, 21 June, 2016, 5:43pm

After the liquor sector’s recent strong performance, analysts now suggest overweighting in high-end producers such as Moutai, Swellfun, and Kouzi Distillery, as bellwether shares could be set to benefit from earnings growth and valuation improvement this year and next.

A recent research note from China International Capital Corporation (CICC), showed the sector’s revenue jumped 16 per cent in the first quarter, mainly driven by a spirited 26 per cent surge by the high-end brands

“The liquor sector’s recent performance validates our bullish call since early 2016,” the note said.

In particular, CICC analysts recommend investing in what they call “value growth names”, such as Shanghai-listed Kweichow Moutai, Sichuan Swellfun, Anhui Kouzi Distillery, Jiangsu King’s Luck Brewery, and Shenzhen-traded Jiangsu Yanghe Brewery Joint-Stock and Anhui Gujing Distillery.

“The sector’s investment value lies in its valuation improvement, driven by visible earnings growth,” the company’s analysts said.

Leading high-end liquor makers are seen as holding the greatest potential for organic growth.

The analysts forecast “visibly fast growth” for Kweichow Moutai, Sichuan Swellfun, Yanghe Brewery and Anhui Kouzi Distillery, given their “key competitive edge in liquor priced more than 200 yuan (per bottle)” and “clear positioning”.

Leading high-end liquor makers are seen as holding the greatest potential for organic growth
Research note from China International Capital Corporation

“The sector is experiencing a fast concentration of revenue in strong brands driven by consumption upgrading, while low-end liquor, which accounts for approximately 90 per cent of sales volume, is contributing to sales volume concentration, a trend that should benefit Shunxin Agriculture,” CICC said.

For first-tier brands, the firm estimates valuations will be more than 20 times price-to-earnings ratio in 2017. And for some industry leaders, they could enjoy even higher.

Kweichow Moutai’s valuation, for instance, may recover to 25 times P/E in the next three years, “driven by its sustained earnings growth of 18 to 20 per cent”, CICC analysts said.

“Moutai’s wholesale price has been largely stable at around 830 yuan, and sales volume ramp-up will likely remain the theme in the coming two years.

“It has sufficient capacity and enjoys rising strength in packaging,” continued the research note.

They said the “fair valuation range” for Anhui Kouzi Distillery and Sichuan Swellfun should be 30 to 35 times P/E in 2017.

Anhui Kouzi focuses on mid-range liquors priced at 80 to 200 yuan per bottle, and high-end brands priced at 200 to 500 yuan.

CICC said the company has five core brands with stable prices and increasingly strong competitiveness.

“The differentiation advantages from its “Jianxiang-type” (mixed fragrance) products, its quality and brand strength will drive high growth in operating revenues, ” it added.

Sichuan Swellfun’s key high-end product, Zhenniang bahao, may also enjoy rapid growth in the next two to three years as it’s more profitable for distributors than most well-known liquor products, given its relatively low net factory price.

Swellfun’s major mid-end liquor products are also likely to have a rising market share, said CICC.

Besides those core brands, its analysts tip Yanghe Brewery Joint-Stock and Jiangsu King’s Luck Brewery to see their valuations increase 20-30 per cent next year.

However, they warned industry risks still exist, as high-end makers’ revenues could miss expectations, if macroeconomic growth slows sharply.