EUR 850.00 For Business Accounts Only

Morningstar | Kweichow Moutai Posted in Line Preliminary Results in 2Q; Raising FVE Slightly to CNY 880. See Updated Analyst Note from 16 Jul 2019

Wide-moat Kweichow Moutai reported second-quarter preliminary results that were in line with our forecasts, with revenue and net profit up 11% and 20% year on year, respectively. We are raising our fair value estimate to CNY 880 per share from CNY 850, mainly because of the time value of money. Meanwhile, we revised up our operating margin forecasts, because we expect the sales contribution from the direct sales channels (higher selling prices) will continue to increase, following the newly established direct sales unit. Although the revenue growth slowed down in the second quarter, we remain optimistic about the company’s outlook and believe it will be able to achieve its midteens profit growth guidance for 2019. In spite of the fair value increases, we think the shares are slightly overvalued at current levels, mainly because our profit growth over the next five years is lower than the market consensus, particularly for 2020. We believe the market is overconfident about the positive effect from the sales reform. Also, the market seems to ignore the negative effect of the company’s production reduction in 2015, which will lower its revenue growth in 2020.

Revenue growth in the second quarter decelerated to 11% from 22% growth in the first quarter. The shipments of 14,000 metric tons in the second quarter were flat from 2018 because of the adjustments for its distribution network. Revenue was driven by the higher average selling prices from the increasing mix of nonstandardized products. Given that the demand for Moutai liquor remains robust, we expect the company will complete its annual target of 31,800 metric tons sales volume. We increase our operating margin forecast slightly to account for higher gross margins on the back of the mix shifting toward the nonstandardized products and from the direct sales.

Because the company asked the distributors to deposit all the payments for third-quarter shipments, we expect advance payments from distributors to improve by the end of the second quarter. Meanwhile, we believe that debottlenecking production expansion will fuel the company’s sales in the long term, given Moutai is on track to complete its annual Moutai base liquor production of 56,000 metric tons, which will be available to sell in 2024.