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Morningstar | China on Track for Diageo Despite Recent Volatility; Shares Fairly Valued

Diageo's president of Greater China and Asia, Samuel Fischer, held a call with investors that went some way to assuaging concerns over the impact of the trade wars and economic slowdown in China on consumer demand. We think Diageo is slowly widening its economic moat in some of the emerging Asian markets, and we are reiterating our wide moat rating and GBP 27 fair value estimate. After a very strong two-year rally, we now regard Diageo as being fairly valued.

An economic slowdown in China would likely dampen domestic demand and Diageo's travel retail volumes from Chinese tourists. Despite the recent volatility, however, Fischer stated that depletions are in line with expectations and had not declined following the recent volatility in the region. Fischer guided to a mid- to high-single-digit value medium-term growth rate for Shui Jing Fang, Diageo's baijiu business, and this is in line with our 6% midcycle growth estimate.

Multi-layer distribution models in markets such as China make Diageo's distribution less of a competitive advantage in Asia than in some western markets, particularly Europe, where entrenched relationships with distributors and on-trade and off-trade retailers help to defend and grow shelf space. However, Fischer stated that the company has recently switched to a sole distributor model, which has allowed the Shui Jing Fang sales team to focus more on outlet activation, a strategy that we think is a step in the right direction to gain more control over distribution and build a wide economic moat in Asia.