Morningstar | Kweichow Moutai’s 1Q 2019 Preliminary Results Beat Our Expectations; Shares Are Fairly Valued
Wide-moat Kweichow Moutai posted first-quarter preliminary results that exceeded the market’s and our expectations, with revenue and net profit increasing 20% and 30% year on year, respectively. We attribute the strong performance to the increasing sales mix in the direct sales channels and from higher-end nonstandardized zodiac liquors. Meanwhile, the midseries liquors also delivered strong growth (up 26%) in the first quarter.That said, we keep our medium-term earnings forecast unchanged and maintain our fair value estimate at CNY 830 per share, as we think the stronger-than-expected growth in the first quarter will not be sustainable throughout the year and the profit growth will decelerate to the midteens level in the second quarter, given it adjusted the shipments from second quarter (typically a soft season) to the first quarter to meet the strong demand during the earlier Chinese New Year holidays, leaving the total full-year target shipments unchanged. We view the shares as fairly valued at current levels, as the market has fully pricing in the upbeat results.
As we expected, the company will benefit from the sales channel reform, which has been shifting more shipments from the traditional distributors to the direct sales channels (such as self-owned stores, customized products sold to group accounts, supermarkets, and online sales platforms), given the price gap between the retail prices and ex-factory prices will drive the revenue and profit growth on the back of the higher average selling prices and gross margins. In the meantime, increasing sales mix from the higher-end nonstandardized products, such as zodiac liquor, will also improve its average selling prices and profitability.
Kweichow Moutai is engaged in the manufacture and sale of "Guizhou Moutai" series distilled spirits; manufacture and sale of beverages, food and packaging materials; development of anti-counterfeiting technologies; and research and development of relevant IT products. Through its subsidiaries, Co. is also engaged in the wholesale of agricultural vice-local products, building materials, decoration materials, metal materials, machineries, electronic products, telecommunication products, hardware, rubber products, general merchandises and furniture. Co.'s products include millesimes liquor, gift liquor, common liquor and other liquor series.
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