EUR 850.00 For Business Accounts Only

Morningstar | Kweichow Moutai’s 1Q 2019 Profits Slightly Higher Than Preliminary Number; Raising FVE to CNY 850. See Updated Analyst Note from 25 Apr 2019

Wide-moat Kweichow Moutai’s first-quarter official results were slightly better than the preliminary numbers, with revenue and net profit growing 22% and 32% year on year, respectively, compared with the 20% and 30% growth previously announced. While sales volume grew 7%, the stronger revenue growth stemmed from the greater mix of higher priced nonstandardized products, particularly zodiac liquor. However, we think revenue growth will decelerate for the rest of the year, as we expect the contribution of nonstandardized products will fade, given that zodiac liquors are mainly sold for the Chinese New Year. Moreover, we expect the full-year sales volume targets will remain unchanged from the company’s guidance, despite first-quarter shipment growth being slightly higher than our expectation. The decreasing advance payments from customers, down 16% from last quarter, reinforced our view, indicating softer shipment growth in the second quarter.

We’re raising our fair value estimate slightly to CNY 850 from CNY 830, as we revise down the average operating expense/sales ratio to 12.5% from 13.6% previously. Although we believe the company will continue to deliver strong growth and remain the industry leader for the long term, we think the shares are currently slightly overvalued, trading at a 12% premium to our new fair value estimate.

Although the company claimed to implement sales channel reform to boost its top-line growth by increasing its sales from direct sales, we were surprised that the 5% sales mix from the direct sales channel didn’t meet the company’s guidance, which was even lower than the average mix of 5.9% in 2018. We believe revenue per bottle (500 milliliters) is higher in the direct to consumer channel, so while channel shift was very limited in the first quarter, the migration to the direct channel going forward should be positive to Moutai’s revenue and margins.

Underlying revenue grew 24% year on year to CNY 21.6 billion in the first quarter, higher than our forecast. High-end Moutai liquor sales increased 24% year on year to CNY 19.5 billion, while midrange series liquor revenue increased 26% year on year to CNY 2.1 billion. Gross margin in the first quarter increased 80 basis points year on year to 92%, thanks to the higher average selling prices from mix, mostly from the nonstandardized products.

Operating expenses (including selling and administrative) to sales ratio was down 1.5 percentage points to 10.5%, mainly owing to lower marketing and advertising costs for the series liquors. Thanks to higher gross margin, lower operating expense ratio, and business tax expense ratio, Moutai’s operating profit in the first quarter grew 31% year on year, while operating margin increased 4 percentage points to 73.9%. Net profit attributable to shareholders was up 32% year on year to CNY 11.2 billion. However, we don’t think the lower operating ratio will be sustainable throughout 2019, as increasing sales from the direct sales channel will increase operating costs.